The Trading Effect

In psychology and behavioral economics, the endowment effect is the hypothesis that people assign more value to things they own. Past studies have shown that experienced securities traders are less susceptible to this bias but the reasons have been unclear. However, researchers at the University of Chicago recently published results of several experiments which suggest the cause, as reported in last week’s UChicago News.

According to study findings, when experienced traders are selling they have “reduced activity in the area of the brain often associated with pain and negative emotions,” thus allowing them to demand a higher price to sell a good than they’re willing to pay for it. This contradicts long-standing economic theory, and suggests that the reduced bias can lead to price distortion and shifts in market activity. As part of the study, a parallel experiment was conducted to see how selling activity by people with no trading experience would impact brain activity, and the results suggest a similar reduction in the endowment effect.

The upshot of the study is that selling activity, regardless of the level of experience, can modify how the brain responds, changing the process that people use to make future decisions.”