Irrational risk‑taking of professionals? The relationship between risk exposures and previous profts

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Abstract

The risk attitude of investors is a key factor determining fnancial 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) efects. 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-fnancial frms and (non-bank) fnancial institutions (insurance companies, fnancial intermediaries, etc.) covering 57,039 FX forward transactions in a highly volatile period between January 2008 and November 2012. Panel regressions for all frms and institutions do not show signifcant behavioral patterns. When investigating each client separately, however, we fnd 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 efects 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.