Until recently, scholars had not made use of field experiments to explore issues in finance. Some of my work fills that void.

Investment under Uncertainty: Testing the Options Model with Professional Traders

Haigh, Michael and List, John A.

Review of Economics and Statistics, (2009), forthcoming.


An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the bad news principle: the downside investment state influences the investment decision, whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, drawn from student and professional trader subject pools, is broadly consonant with the options model.

Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion

Harrison, Glenn W., John A. List, and Charles Towe

Econometrica, (2007), 75 (2), pp. 433-458.


Does individual behavior in a laboratory setting provide a reliable indicator of behavior in a naturally occurring setting? We consider this general methodological question in the context of eliciting risk attitudes. The controls that are typically employed in laboratory settings, such as the use of abstract lotteries, could lead subjects to employ behavioral rules that differ from the ones they employ in the field. Because it is field behavior that we are interested in understanding, those controls might be a confound in themselves if they result in differences in behavior. We find that the use of artificial monetary prizes provides a reliable measure of risk attitudes when the natural counter- part outcome has minimal uncertainty, but that it can provide an unreliable measure when the natural counterpart outcome has background risk. Behavior tended to be moderately risk averse when artificial monetary prizes were used or when there was minimal uncertainty in the natural nonmonetary outcome, but subjects drawn from the same population were much more risk averse when their attitudes were elicited using the natural nonmonetary outcome that had some background risk. These results are consistent with conventional expected utility theory for the effects of background risk on attitudes to risk.

Information Cascades: Evidence from a Field Experiment with Financial Market Professionals

Alevy, Jonathan E., Michael S. Haigh, and John A. List

Journal of Finance, (2007), 62(1), pp. 151-180.


Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. Analysis of over 1,500 individual decisions suggests that CBOT professionals behave differently from our student control group. For instance, professionals are better able to discern the quality of public signals and their decisions are not affected by the domain of earnings. These results have implications for market efficiency and are important in both a positive and normative sense.

Investigating Risky Choices Over Losses Using Experimental Data

Mason, Charles F., Jason F. Shogren, Chad Settle, and John A. List

Journal of Risk and Uncertainty, (2005), 31(2), pp. 187-215.


We conduct a battery of experiments in which agents make choices from several pairs of all-loss-lotteries. Using these choices, we estimate a representation of individual preferences over lotteries. We find statistically and economically significant departures from expected utility maximization for many subjects. We also estimate a preference representation based on summary statistics for behavior in the population of subjects, and again find departures from expected utility maximization. Our results suggest that public policies based on an expected utility approach could significantly underestimate preferences and willingness to pay for risk reduction.

Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis

Haigh, Michael S. and John A. List

Journal of Finance, (2005), 60(1), pp. 523-534.


Two behavioral concepts, loss aversion and mental accounting, have been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence supports the theory, as students’ behavior has been found to be consistent with myopic loss aversion (MLA). Yet, much like certain anomalies in the realm of riskless decision-making, these behavioral tendencies may be attenuated among professionals. Using traders recruited from the CBOT, we do indeed find behavioral differences between professionals and students, but rather than discovering that the anomaly is muted, we find that traders exhibit behavior consistent with MLA to a greater extent than students.

A simple test of expected utility theory using professional traders

List, John A. and Michael S. Haigh

Proceedings of the National Academy of Science, (2005), 102(3), pp. 945-948.


We compare behavior across students and professional traders from the Chicago Board of Trade in a classic Allais paradox experiment. Our experiment tests whether independence, a necessary condition in expected utility theory, is systematically violated. We find that both students and professionals exhibit some behavior consistent with the Allais paradox, but the data pattern does suggest that the trader population falls prey to the Allais paradox less frequency than the student population.

Testing neoclassical competitive market theory in the field

List, John A.

Proceedings of the National Academy of Science, (2002), 99(24), pp. 15827-15830.


This study presents results from a pilot field experiment that tests predictions of competitive market theory. A major advantage of this particular field experimental design is that my laboratory is the market place: subjects are engaged in buying, selling, and trading activities whether I run an exchange experiment or am a passive observer. In this sense, I am gathering data in a natural environment while still maintaining the necessary control to execute a clean comparison between treatments. The main results of the study fall into two categories. First, the competitive model predicts reasonably well in some market treatments: the expected price and quantity levels are approximated in many market rounds. Second, the data suggest that market composition is important: buyer and seller experience levels impact not only the distribution of rents but also the overall level of rents captured. An unexpected result in this regard is that average market efficiency is lowest in markets that match experienced buyers and experienced sellers and highest when experienced buyers engage in bargaining with inexperienced sellers. Together, these results suggest that both market experience and market composition play an important role in the equilibrium discovery process.

Gender differences in revealed risk taking: evidence from mutual fund investors

Dwyer, Peggy D., James H. Gilkeson, and John A. List

Economics Letters, (2002), 76(2), pp. 151-158.


Using data from a national survey of nearly 2000 mutual fund investors, we investigate whether investor gender is related to risk taking as revealed in mutual fund investment decisions. Consonant with the received literature, we find that women exhibit less risk-taking than men in their most recent, largest, and riskiest mutual fund investment decisions. More importantly, we find that the impact of gender on risk taking is significantly weakened when investor knowledge of financial markets and investments is controlled in the regression equation. This result suggests that the greater level of risk aversion among women that is frequently documented in the literature can be substantially, but not completely, explained by knowledge disparities.

Evidence of Early Withdrawal in Time Deposit Portfolios

Gilkeson, James H., John A. List, and Craig K. Ruff

Journal of Financial Services Research, (1999), 15(2), pp. 103-122.


The embedded options found in some securities are known to have significant impact on product pricing, secondary market valuation, and risk measurement and management. The option to withdraw commonly found in bank deposits is one of the least studied of these. We help to ®ll this gap by examining the level and interest rate sensitivity of early withdrawals of retail time deposits using panel data from the Thrift Financial Report. We find that longer-maturity time deposit portfolios commonly experience early withdrawals at economically significant levels. Further, we find that depositors respond positively, with increased levels of early withdrawal, to the reinvestment incentive they face when new deposit rates rise. These findings increase our understanding of consumer behavior with regard to financial products and have significant implications for the competitive pricing of deposit products and the management of bank interest rate risk.