The
One of the winners is a CalTech economist most famous for calling
In 2010, Dr. Colin Camerer co-authored, "Using Neural Data to Test A Theory of Investor Behavior: An Application to Realization Utility." It is his most downloaded paper, according to the St. Louis Fed.
Camerer and his co-authors found that the "realization utility" model of
"Realization utility" describes the phenomenon of a given trader being more prone to taking "realized gains," or immediate profits, than to allow "paper gains" linger on their theoretical balance sheet.
As they put it:
"[The 'realization utility' trader is] keen to realize capital gains as soon as possible and to postpone realizing capital losses for as long as possible."
For a significant number of traders, a part of the
When that happens, this results:
"...there were a total of 495 occasions in which our subjects realized gains, and that most of these decisions were suboptimal. Given that stocks exhibit short-term price momentum in the experiment, it is generally better to hold on to a stock that has been performing well. This explains why most (77.9%) of subjects' decisions to hold on to winning stocks were optimal, and why most (67.5%) of subjects' decisions to sell winning stocks were suboptimal. Similarly, in the experiment, it is generally better to sell a stock that has been performing poorly. This explains why most (79.2%) of subjects' decisions to sell losing stocks were optimal, while most (80.3%) of their decisions to hold these stocks were suboptimal."
Here's the chart:
The finding "stands in sharp contrast to the prediction of a simple rational trading model in which subjects maximize the expected value of final earnings."
Ouch.
Camerer's most cited paper, according to the St. Louis Fed, is his 1999 work "Experience-Weighted Attraction Learning In Normal Form Games," which proposes an entire new way of looking at how humans learn, called "experience weighted attraction."
Camerer and his co-author Teck-Hua Ho found this concept captures the phenomena of subjects combining belief learning and experience learning.
Camerer and his fellow "geniuses" get $625,000 paid out over five years - not chump change to an academic!