Professional Traders and Myopic Loss Aversion

Study Proposal #2:  Professional Traders and Myopic Loss Aversion (C) | 25SEP13

Claim

Myopic Loss Aversion and speed of thought are both essential though seemingly contradictory skills for professional traders. A trader needs rapidly engage with a large volume of information quickly in order to enter a potentially gainful position of risk, at which point myopic loss aversion is necessary and successful. By first thinking fast, the trader identifies the risky situations with the greatest payoff. It seems to be essential that once this risky situations engaged with, the trader must quickly switch to myopic loss aversion to capitalize on the opportunity. Using this contradictory duality is likely a learned trait that exists primarily in professional populations. I claim that the ability to perform this switch is essential to their success.

Study

To limit the complexity of this experiment, a 2×2 experimental matrix with testing on both students and professional traders will be sufficient. The traders choices must be compared to that of a control population, in this case undergraduate students.

In experiment 1, all participants will be rapidly given information in a video on two choices for probabilistic betting games they can play. After, they will be asked to make a choice about which game they will play. All participants will be informed that they can make a single bet at the beginning of the game. This bet will go through three different stages in either game, but they will not be able to change their bet at any point. Participants will be able to choose whether they see the result of their bet at each stage. The end of each stage will be indicated, and a button must be pressed to move to the next stage. In experiment 2, all conditions will be the same except for that the participants are able, but not forced, to make changes to their bet after each stage of either game. They are still able to choose whether or not to actually see the information on their status of their bet at each stage. If they choose not to see this status, they are effectively able to go to the final bet with only the original knowledge of which game they played.

Hypothesis

    If my claim about how dualistic thinking is a property of the professional trader population, then this study will find that in the results of experiment 2 the traders will choose to receive no information and switch from fast thinking to MLA when moving onto the next stage of their bets at a higher frequency than lay people.

Implications

This study would suggest that information scarcity and information overload (myopic risk aversion and fast thinking) are both essential though seemingly contradictory skills for traders.