Option pricing by students and professional traders: A behavioural investigation

Klaus Abbink, Bettina Rockenbach

Research output: Contribution to journalArticleResearchpeer-review

30 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)497 - 510
Number of pages14
JournalManagerial and Decision Economics
Volume27
Issue number6
DOIs
Publication statusPublished - 2006
Externally publishedYes

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