There is ample evidence that past performance affects the trading decisions of individual investors. This paper looks at this issue using a detailed database of currency trading decisions of institutional investors. Past performance manifestly affects currency risk-taking in this group, but the sign and magnitude of the effect runs counter to much of the existing theory and evidence. There is no evidence whatsoever of disposition effects; rather, the dominant characteristic is aggressive risk reduction in the wake of losses. This effect is more prominent later in the year, and among older and more experienced funds. A modified version of the loss aversion model of Barberis, Huang and Santos (2001) offers the best hope of adequately accounting for the observed behavior.
institutional investors, past performance, loss aversion
Economic Theory | Organizational Behavior and Theory
TEO, Song Wee Melvyn and O'CONNELL, Paul G. J..
Prospect theory and institutional investors. (2003). 1-39. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/5231
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