Cognitive limitation and investment performance: Evidence from limit order clustering

Wei Yu Kuo, Tse Chun Lin, Jing Zhao

Research output: Journal article publicationJournal articleAcademic researchpeer-review

28 Citations (Scopus)

Abstract

We hypothesize that cognitive limitation may be manifested in a disproportionately large volume of limit orders submitted at round-number prices if investors use these numbers as cognitive shortcuts. Using detailed limit order data in the Taiwan Futures Exchange, we find that investors with lower cognitive abilities, defined as higher limit order submission ratios at round numbers, suffer greater losses in their round-numbered and non-round-numbered limit orders, market orders, and round-trip trades. The positive correlation between cognitive ability and investment performance is monotonic and robust across futures and options markets. In addition, past trading experience helps mitigate cognitive limitation.
Original languageEnglish
Pages (from-to)838-875
Number of pages38
JournalReview of Financial Studies
Volume28
Issue number3
DOIs
Publication statusPublished - 1 Jan 2015
Externally publishedYes

Keywords

  • G02
  • G15

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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