Insights into Trader Behavior: Risk Aversion and Probability Weighting

The objective of this study is to investigate how professional traders in futures and optionsmarkets behave under risk and uncertainty. Our preliminary findings suggest that most tradersexhibit concave utility functions for gains and convex utility functions for losses, while theirweighting functions are inverse s-shaped. However, differences in magnitude of the risk aversionparameters and the degree of probability weighting can lead to distinct behavior even if theshapes of utility and weighting functions are the same. Further, the typical pattern of prospecttheory is more prevalent under risk but not as much under uncertainty. More combinations ofshapes for utility and weighting functions are found under uncertainty, suggesting that differenttypes of behavior emerge when people need to make their own assessments about the likelihoodof events. Finally, our results are consistent with evidence of loss aversion and disposition effectfound in studies of trading behavior in futures markets.