Option Pricing by Students and Professional Traders: A Behavioural Investigation

Klaus Abbink and Bettina Rockenbach ()
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Bettina Rockenbach: Lehrstuhl fuer Mikrooekonomie, Universitaet Erfurt

No 2005-12, Discussion Papers from The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham

Abstract: We compare the behaviour of students and professional traders from an influential German bank in an experiment involving financial options. The arbitrage free option price is independent of the probability distribution of the underlying asset. The experimental data uncover a probability dependent option valuation of the students, however, they learn to exploit more arbitrage as they gain experience. The professional traders exhibit a less probability sensitive valuation, but their overall performance is lower than the students’. We offer the explanation that the professional traders choose a more intuitive and less analytic pattern of behaviour than the students, despite their superior knowledge in financial market theory and practice. At real financial markets, traders are typically not confronted with given and known exact probability distributions, but they must rather rely on their intuitive calibration of the prospects.

Keywords: Experiment; Option Pricing; Arbitrage; Bounded Rationality (search for similar items in EconPapers)
JEL-codes: C91 G12 G14 (search for similar items in EconPapers)
Date: 2005-07
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Forthcoming in Managerial and Decision Economics

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Journal Article: Option pricing by students and professional traders: a behavioural investigation (2006)
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