Irrational risk-taking of professionals? The relationship between risk exposures and previous profits

Edina Berlinger, Barbara Dömötör () and Balázs Árpád Szűcs ()
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Balázs Árpád Szűcs: Corvinus University of Budapest

Risk Management, 2021, vol. 23, issue 3, No 3, 243-259

Abstract: Abstract The risk attitude of investors is a key factor determining financial asset prices and market trends. Changes in risk attitude may be due to the interference of macro-level (business cycle) and micro-level (individual experience) effects. We investigate the impact of individual experience on the subsequent risk-taking attitude of professionals via the analysis of the trading activity of 351 non-financial firms and (non-bank) financial institutions (insurance companies, financial intermediaries, etc.) covering 57,039 FX forward transactions in a highly volatile period between January 2008 and November 2012. Panel regressions for all firms and institutions do not show significant behavioral patterns. When investigating each client separately, however, we find that 39.7% of the clients having enough transactions to analyze statistically tend to increase their risk exposure irrationally after large gains or losses which can be the manifestation of the break-even and house-money effects well-documented in the literature for non-professionals. This irrational behavior may destroy value, so both market players and regulators should pay attention to monitor and control it.

Keywords: Corporate risk management; Behavioral finance; Individual experience; Break-even effect; House-money effect (search for similar items in EconPapers)
JEL-codes: G02 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41283-021-00076-5

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