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Option pricing by students and professional traders: a behavioural investigation
Author(s) -
Abbink Klaus,
Rockenbach Bettina
Publication year - 2006
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1284
Subject(s) - valuation (finance) , arbitrage , exploit , economics , german , valuation of options , asset (computer security) , financial economics , actuarial science , business , econometrics , microeconomics , finance , computer science , computer security , archaeology , history
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.