ANALYSIS OF A TRADING EXPERIMENT
Analysis of a Trading Experiment
Today, many fields have professionals that provide expertise and guidance whenever people need to make decisions. Such professionals offer technical advice because of the nature of knowledge they have in a specific field. The knowledge is not common to all people hence they rely on professional advice to make their decisions, an element that determines their success in whatever they are doing. In some cases, people have to weigh their decisions against the advice given by professionals because they may not necessarily agree with the perceptions of the professionals (Spencer 2009). Similar to the professionals, they may use natural intuition to counter the arguments put forward by the professionals.
Trading forex relies on both strategies and the ability to predict trends using personal judgment. There are professionals in the field who understand the nature of the behavior of foreign markets. The analysts often make recommendations to other traders advising them on the appropriate time to buy currencies, sell them, or do nothing about the transaction. However, traders do not follow the instructions given by analysts all the time. Given the volatile nature of trading foreign currencies, recommendations from analysts come in handy in helping traders to make decisions. However, traders do not follow this advice if they do not agree with the decisions of the analysts. The paper evaluates whether the recommendations often increases the level of profitability of the trade compared to the losses made by the traders. In addition, the paper examines the effect of gender in following the recommendations given by the analysts. According to the results of the statistics, it is possible that the decision to accept the recommendations given by the analyst depends on the individual’s gender. Interestingly, society places roles upon people that also tends to affect the manner in which the make their decisions (Tilkin & Epstein 2011).
Researchers argue that investors have a tendency to integrate their losses and segregate their gains. Integration is the act of combining several elements together into one unit. On the o0ther hand, segregation is the isolation of an element, which is setting it apart from the whole group and identifying it as unique. One can argue that it is not possible to evaluate the two concepts in trading. However, an evaluation of the mental behavior among male and female investors shows that segregation of gains and losses happens unconsciously (Sharma &Bhal 2004). Mental accounting and the theory of prospects explain investor behavior quite comprehensively. The theory of prospects holds that people do not have similar valuation for losses and gains. They base their decisions on the perception of possible gains rather than losses. Therefore, given the choice between the possibility of a profit and that of a loss, a rational investor will choose the profitable possibility.
The theory expressed one in which the recommendations by currency analysts affect the profitability of trades. In all the one hundred and seven trades conducted by males and females in the experiment, all of them continued to trade regardless of making losses. In fact, those who incurred losses without the recommendations and later made profits after following the recommendations, continued to trade regardless of the losses. The explanation behind the continuation to engage in trade is that traders isolated the single profit they made before the losses and saw the possibility of more profits (Innocenti &Sirigu 2012).
Under the recommendations of the analyst, both male and female traders would prefer to make an isolated profit as long as it can cover the cost of investment and the losses integrated losses. However, studies to affirm the theory of prospects are few as counterarguments assert that the continuity in trading is a measure used to cushion the possibility of losses as traders seek to maximize trade and minimize profits. The question of mental accounting centers on the evaluation of outcome by investors. In this light, mental accounting seeks to determine if investors examine their outcomes for each investment or the overall outcomes of the investment. It relies heavily in the function of the value and utilizes the concept of diminishing sensitivity where they prefer to classify their losses together while gains are separate from one another. However, another technique allows investors to maximize the utility of their investors. The Hedonic-editing hypothesis allows investors to combine or divide their losses and gains arbitrarily in a bid to derive maximum satisfaction (Borman 2012). However, the process has mixed outcomes for the investors. In the experiment, none of the traders employed this technique as they fell victim of the theory of prospects. They integrated their losses at the expense of making isolated profits in their trade.
The Analysts’ Recommendations versus Profit in Trade
Recommendations made by analysts do not lead to more profitable trades than trades based on the judgment of the trader. In the trading experiment between 22nd and 23 October, nearly sixty percent of the traders who accepted the recommendations of the analysts did not make the profits they expected. However, the others depended on their judgment and analysis and realized the expected trading profits. The results observed are a normal expectation given that analysts have professional knowledge in the stock market, and they can interpret the behavior of currencies with better precision than the traders can (Lim 2006). It is also a confirmation of the volatile nature of the trading such that people cannot predict the behavior of the market with precision.
Here, the ability to make decisions under conditions of certainty and uncertainty come into the light. The volatility of the stock market makes trading an uncertain practice in the corporate world. Decision-making in conditions of uncertainty depends on various factors. Apart from probabilities computed suing mathematical methods, it depends on familiarity and ambiguity. For instance, trading involves numerous markets across the world, which implies that the transactions happen at different times across the world. The trader’s decision will depend on their familiarity of the time zones in different regions of the world. They must be familiar with these time zones so they can the instances to take advantage and maximize the revenues from the trades. Ambiguity in this context applies in a manner that traders use trading strategies they are not certain if they will make profits.
A study conducted in Beijing using 325 subjects showed that 49.4 percent of the subjects had a tendency to avert ambiguity in decks that can have equal chances of similar outcomes. They averted the ambiguity as much as there was a 20 percent incentive on the deck that could pay more. In the light of familiarity, 39.6 percent of the subjects selected Beijing temperature over that of Tokyo because they were familiar with the temperature requirements although the bet on Tokyo promised a 20 percent incremental outcome. Similarly, the traders in the experiment tended to adhere to the recommendations of the analysts because of the level of the familiarity the analysts have with the trade markets. It explains the higher percentage noted in those who accepted the recommendation compared to the ones who rejected it. On a similar note, the level of ambiguity remains significantly lower because all traders are aware that analysts have adequate knowledge of the stock market but they cannot foretell the conditions with precision because of the expected ambiguity.
Ambiguity affects the outcomes of the games of chance because of the notion enshrined within a lottery. The notion asserts that the subjective and objective perceptions of a lottery relate to the probabilities associated with it and the expected outcomes (Tversky & Kahneman 2006). Therefore, the Keynesian view offered in contrarian perspective comes into the light. Keynes held that people ought to prefer a line of action that bases upon the greater knowledge they have. Moreover, more recognition goes to the fact that decision making under uncertain conditions relies on how the uncertainty arises besides the probabilities. The situation is called source dependence. Particularly, source dependence holds that people prefer to bet on certain risks because they are aware of the sources of the uncertainty within that risk (Anker 2007). Risk aversion is lower in risks that have known source compared to those that do not.
The social environment and the individual’s self-esteem affect personal relationships, which have an effect on the process of decision-making. Given that people do not have perfect knowledge regarding their abilities, those who acquire certain benefits from their performance can manipulate their levels of self-confidence (Benabou & Tirole 2000). Psychological studies indicate that the principal in an informed position often develops a certain structure for incentives to the party they seek to influence. For instance, they can offer certain rewards or encouragement for the results they achieve. Rewards often arc as motivating factor, although such motivation is weak because it has weak reinforcements. On a similar note, similar self-empowerment tends to increase an individual’s level of confidence (Chew, Ebstein, & Zhong, 2001). The explanation relates to the trade such when comparing traders who followed the recommendations by the analysts and those who generated revenue themselves. Since analysts are in a position of power or information, they can easily manipulate the confidence of the trading party. Consequently, more than half the traders who made profits after accepting the recommendations by the analysts repeated the trend after realizing the profits. It could be attributed to the manipulation of the traders’ confidence by the information they received from the analysts. On the other hand, those who made profits by themselves had little tendencies to follow the recommendations of the analysts because they had higher self-confidence.
The Effect of gender on Accepting Recommendations
Gender attributes tend to affect decision making because of the roles played by males and females in the society. Moreover, men and women have different attributes that determine how fast they can follow decisions under the influence of other people. In the experiment, it is important to note that nearly 55 percent of the traders who adhered to the recommendation of the analysts are female. On the other hand, 65 percent of those who followed the recommendations and realized a profit are males.
Here, the question of decision-making features because there is a disparity between the statistics of males and females who used the recommendations. More women followed the recommendations because of the societal roles they play. Naturally, women play submissive roles where they often support the decisions made by their husbands. Here, the recommendations form the basis for a trader to make a decision such that if they reject them, they know that they contradict a certain pre-judged decision. The trader does not make an autonomous decision as they would if they did not have a recommendation by the analyst. Given the nature of their societal roles, women will tend to consider the recommendation more than the men do. Similarly, men have an element of ego because of their societal position. Likewise, it is rare for them to succumb to a decision made on their behalf. It explains why few of them would rather make their judgment than rely on the perspectives of the analysts. They prefer to be in charge rather than letting the analysts seem they are in control of their trading activities. Consequently, they are ready to deal with the negative consequences of their judgment unlike the women who often prefer to use a cautious approach.
Gender centers on the normative and the descriptive and normative perspectives of decision-making. The normative side examines how individuals make decisions based on their rational behavior and statistical model developed by specialist in a particular field. On the contrary, the descriptive perspective examines how individuals choose basing on the psychological aspects involved in their decisions. According to the trends in the trade, men tend to use the normative perspectives because they prefer to make inferences and judgment on their own. They want to have an element of independence, unlike the women. It explains why fewer men trade according to the perceptions given by the analysts. On the contrary, women do not mind making decisions and engaging in trade based on the assumptions of the analysts.
The emotive factor of decision-making also comes into play. It sheds light on the element of decision making depending on the available facts and the emotional element involving the decision. Women use the decisions and opinions of other people to reach their conclusions, unlike the men. However, men would rather use these opinions to formulate their opinion and judgment. For instance, more women engaged in the trade because of the recommendation. Instead of seeking an independent opinion, they would rather find out the reason the strategy worked for someone else or the previous trade. They, unlike men, have an emotional connection to the things that happen around them. In fact, the fact that more women made more profits on following the recommendations indicates that they connected the possibility of losing their investment to the emotional setback it would have on them. Therefore, the paid more attention to the criteria used by the analysts to give a recommendation, a possible element that may have allowed them to make better inferences than the men. On the other hand, men have little emotional connection with the surrounding hence they cannot attach emotive elements to the possible loss that may incur. As a result, gender disparities affect the manner in which people handle situations and pay attention to the things happening around them. Emotions women help to pay attention by connecting themselves to the activities they do.
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