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Prior Consequences and Subsequent Risk Taking: New Field Evidence from the Taiwan Futures Exchange

Author

Listed:
  • Yu-Jane Liu

    (Department of Finance, Guanghua School of Management, Peking University, Beijing 100871, People's Republic of China)

  • Chih-Ling Tsai

    (Graduate School of Management, University of California, Davis, Davis, California 95616)

  • Ming-Chun Wang

    (National Kaohsiung First University of Science and Technology, Kaohsiung 81164, Taiwan)

  • Ning Zhu

    (Graduate School of Management, University of California, Davis, Davis, California 95616; and Shanghai Advanced Institute of Finance (SAIF), Shanghai 200030, People's Republic of China)

Abstract

We use a data set from market participants in the Taiwan Stock Exchange Capitalization Weighted Stock Index options markets to demonstrate a strong positive relationship between prior trading outcomes and subsequent risk taking. In particular, investors in this market take above-average risks in afternoon trading after morning gains. The phenomenon is prevalent in all three types of market makers' accounts and across different types of market participants. Our findings are consistent with the argument that prior outcomes affect subsequent risk taking through a relationship that is sensitive to the model parameters (i.e., expected return, trading period, and curvature of the value function), because prospect theory can predict both increased and decreased levels of subsequent risk taking. We provide possible explanations behind the phenomenon and discuss reasons for the variety of findings in the existing literature.

Suggested Citation

  • Yu-Jane Liu & Chih-Ling Tsai & Ming-Chun Wang & Ning Zhu, 2010. "Prior Consequences and Subsequent Risk Taking: New Field Evidence from the Taiwan Futures Exchange," Management Science, INFORMS, vol. 56(4), pages 606-620, April.
    • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:4:p:606-620
    DOI: 10.1287/mnsc.1090.1131
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    References listed on IDEAS

    as
    1. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors and Stock Option Exercise," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 601-627.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1233-1260.
    4. Nicholas Barberis & Ming Huang & Richard H. Thaler, 2006. "Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing," American Economic Review, American Economic Association, vol. 96(4), pages 1069-1090, September.
    5. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
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