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Irrational risk-taking of professionals? The relationship between risk exposures and previous profits

Author

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  • Edina Berlinger

    (Corvinus University of Budapest)

  • Barbara Dömötör

    (Corvinus University of Budapest)

  • Balázs Árpád Szűcs

    (Corvinus University of Budapest)

Abstract

The risk attitude of investors is a key factor determining financial asset prices and market trends. Changes in risk attitude may be due to the interference of macro-level (business cycle) and micro-level (individual experience) effects. We investigate the impact of individual experience on the subsequent risk-taking attitude of professionals via the analysis of the trading activity of 351 non-financial firms and (non-bank) financial institutions (insurance companies, financial intermediaries, etc.) covering 57,039 FX forward transactions in a highly volatile period between January 2008 and November 2012. Panel regressions for all firms and institutions do not show significant behavioral patterns. When investigating each client separately, however, we find that 39.7% of the clients having enough transactions to analyze statistically tend to increase their risk exposure irrationally after large gains or losses which can be the manifestation of the break-even and house-money effects well-documented in the literature for non-professionals. This irrational behavior may destroy value, so both market players and regulators should pay attention to monitor and control it.

Suggested Citation

  • Edina Berlinger & Barbara Dömötör & Balázs Árpád Szűcs, 2021. "Irrational risk-taking of professionals? The relationship between risk exposures and previous profits," Risk Management, Palgrave Macmillan, vol. 23(3), pages 243-259, September.
    • Handle: RePEc:pal:risman:v:23:y:2021:i:3:d:10.1057_s41283-021-00076-5
    DOI: 10.1057/s41283-021-00076-5
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    References listed on IDEAS

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    Cited by:

    1. Friesz, Melinda & Váradi, Kata, 2023. "Your skin or mine: Ensuring the viability of a central counterparty," Emerging Markets Review, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Corporate risk management; Behavioral finance; Individual experience; Break-even effect; House-money effect;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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