Siddiqi, Hammad (2010): The relevance of coarse thinking for investors' willingness to pay: An experimental study.
Download (422Kb) | Preview
People tend to think by analogies. We investigate whether thinking-by-analogy matters for investors’ willingness to pay for a risky asset in a laboratory experiment. We find that thinking-by-analogy has a strong influence when the assets in question have similar (but not identical) payoffs. The hypothesis of thinking-by-analogy or coarse thinking clearly outperforms other hypotheses including the hypothesis of arbitrage-free or rational pricing. When the similarity between the payoffs is reduced, the risk neutral hypothesis outperforms the hypothesis of thinking-by-analogy. Regardless of the similarity between the payoffs, the arbitrage-free or rational pricing remains the hypothesis with the worst performance.
|Item Type:||MPRA Paper|
|Original Title:||The relevance of coarse thinking for investors' willingness to pay: An experimental study|
|Keywords:||Coarse Thinking; Thinking-by-Analogy; Asset Pricing; Call Option|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C90 - General
G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Hammad Siddiqi|
|Date Deposited:||16. Jul 2010 12:51|
|Last Modified:||15. Feb 2013 10:49|
Babcock, L., & Loewenstein, G. (1997). “Explaining bargaining impasse: The role of self-serving biases”. Journal of Economic Perspectives, 11(1), 109–126.
Babcock, L., Wang, X., & Loewenstein, G. (1996). “Choosing the wrong pond: Social comparisons in negotiations that reflect a self-serving bias”. The Quarterly Journal of Economics, 111(1), 1–19.
Black, F., Scholes, M. (1973). “The pricing of options and corporate liabilities”. Journal of Political Economy 81(3): pp. 637-65
Bossaerts, P., Plott, C. (2004), “Basic Principles of Asset Pricing Theory: Evidence from Large Scale Experimental Financial Markets”. Review of Finance, 8, pp. 135-169.
Carpenter, G., Rashi G., & Nakamoto, K. (1994), “Meaningful Brands from Meaningless Differentiation: The Dependence on Irrelevant Attributes,” Journal of Marketing Research 31, pp. 339-350
Edelman, G. (1992), Bright Air, Brilliant Fire: On the Matter of the Mind, New York, NY: BasicBooks.
Hogarth, R. M., & Einhorn, H. J. (1992). “Order effects in belief updating: The belief-adjustment model”. Cognitive Psychology, 24.
Holyoak, J. K., and Thagard, P., “Mental Leaps: Analogy in Creative Thought”, MIT Press, Cambridge, 1995.
Kahneman, D., & Frederick, S. (2002). “Representativeness revisited: Attribute substitution in intuitive judgment”. In T. Gilovich, D. Griffin, & D. Kahneman (Eds.), Heuristics and biases (pp. 49–81). New York: Cambridge University Press.
Kahneman, D., & Tversky, A. (1982), Judgment under Uncertainty: Heuristics and Biases, New York, NY: Cambridge University Press.
Kluger, B., & Wyatt, S. (2004). “Are judgment errors reflected in market prices and allocations? Experimental evidence based on the Monty Hall problem”. Journal of Finance, pp. 969–997.
Lakoff, G. (1987), Women, Fire, and Dangerous Things, Chicago, IL: The University of Chicago Press.
Mullainathan, S., Schwartzstein, J., & Shleifer, A. (2008) “Coarse Thinking and Persuasion”. The Quarterly Journal of Economics, Vol. 123, Issue 2 (05), pp. 577-619.
Rendleman, R. (2002), Applied Derivatives: Options, Futures, and Swaps. Wiley-Blackwell.
Rockenbach, B. (2004), “The Behavioral Relevance of Mental Accounting for the Pricing of Financial Options”. Journal of Economic Behavior and Organization, Vol. 53, pp. 513-527.
Siddiqi, H. (2008). “Is the Lure of Choice Reflected in Market Prices? Experimental Evidence based on the 4-Door Monty Hall Problem”. Journal of Economic Psychology, vol. 30, issue 2, pages 203-215.
Sternberg and Lubart (1993), “Investing in Creativity”, Psychological Inquiry Zaltman, G. (1997), “Rethinking Market Research: Putting People Back In,” Journal of Marketing Research 34, pp. 424-437.