Behavioral biases in short selling—An experimental study

Short selling is a common practice in financial markets. Although there is extensive research concerning short selling and short sellers, in the behavioral and experimental economics literature, there are only a few studies that examine it. This paper investigates the pricing of two forms of short selling both theoretically and experimentally—selling a lottery short and paying to close the short position. The theoretical framework presents and analyzes the two positions and the influence of the anchoring and uncertainty effects on the pricing. To test the theoretical framework, we asked participants in an experiment about the price they were willing to accept for the obligation to pay the lottery's outcome and the price they were willing to pay to close the obligation to pay the lottery's outcome they held. Moreover, we used a simple lottery with different framings, each one with a different anchor. Our results suggest that in the short-selling position, behavioral biases, such as anchoring and uncertainty, impact the decision-makers' bid prices.