Munich Personal RePEc Archive

Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment

Siddiqi, Hammad (2009): Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment.

[img]
Preview
PDF
MPRA_paper_13515.pdf

Download (207kB) | Preview

Abstract

Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We test this hypothesis in an experiment on financial options against the benchmark of arbitrage-free pricing. Firstly, we test whether a financial option is priced in analogy with its underlying stock (transference). Secondly, we test for whether variations in the analogy between a financial option and its underlying stock matter (framing). We find evidence in support of both transference and framing.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.