Option pricing by students and professional traders: a behavioural investigation

Klaus Abbink and Bettina Rockenbach
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Klaus Abbink: School of Economics, The University of Nottingham, University Park, Nottingham NG7 2RD, UK, Postal: School of Economics, The University of Nottingham, University Park, Nottingham NG7 2RD, UK
Bettina Rockenbach: Lehrstuhl für Mikroökonomie, Universität Erfurt, Nordhäuser Str. 63, 99089 Erfurt, Germany, Postal: Lehrstuhl für Mikroökonomie, Universität Erfurt, Nordhäuser Str. 63, 99089 Erfurt, Germany

Managerial and Decision Economics, 2006, vol. 27, issue 6, pages 497-510

Abstract: We compare behaviour of students and professional traders from an influential German bank in an option pricing experiment. The arbitrage free price is independent of the probability distribution of the underlying asset. Students show a probability-dependent option valuation, but learn to exploit more arbitrage with experience. The professional traders exhibit a less probability sensitive valuation, but their performance is lower than the students'. We explain this with a more intuitive and less analytic approach used by the professional traders, despite their superior knowledge of financial markets, due to the lack of known probability distributions in real markets. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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