Traders’ risk behavior hinges on anticipated bonus reference points

Evidence

In the case of professional traders in financial markets, the relevant subjective reference point may be an anticipated level of bonus, and Kahneman and Tversky’s prospect theory would suggest that “a trader expecting a good performance (and thus bonus) outcome will be reluctant to put those anticipated gains at risk whereas a trader anticipating a poor outcome will be more willing to take risks to avoid that negative outcome” (Fenton- O’Creevy, Nicholson, Soane, and Willman 2005, p. 181). — Donald MacKenzie, An Engine, Not a Camera, 1200

Categorization

• XREF: Directly relevant to the reader’s finance/financialization interest: applies a psychology-of-decision framework to real trader bonus incentives. — connects to: Risk attitude determines how an investment’s value differs from its expected payoff — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 534; Framing a decision shifts the reference point and thereby changes risk preference — John T. Jost and Jim Sidanius, Political Psychology, 2415; Prospect theory shows risk attitudes shift with gain or loss framing — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1199
• SHARE: Narrow enough to interest someone working on trader incentives or compensation structures specifically.

Broader Connections

• Framing a decision shifts the reference point and thereby changes risk preference #expands (0.85) — John T. Jost and Jim Sidanius, Political Psychology, 2415
• Prospect theory shows risk attitudes shift with gain or loss framing #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1199