Do Behavioral Biases Affect Prices?

Joshua D. Coval and Tyler Shumway
May, 2001


This paper documents strong evidence of behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss-averse. Traders who experience morning losses are about 16 percent more likely to assume above-average afternoon risk than traders with morning gains. This behavior has important short-term consequences for afternoon prices, as losing traders are prepared to purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, during the ten minutes that follow these trades, prices revert strongly to their earlier levels. Consistent with these findings, short-term afternoon price volatility is positively related to the prevalence of morning losses among locals, but overall afternoon price volatility is not.

A full-text version of this paper in Adobe Acrobat (.pdf) format is available for downloading here. To download a free copy of the Acrobat reader, visit Adobe's web site.

Home Page Business School Research Papers

Tyler Shumway