The relevance of coarse thinking for investors' willingness to pay: An experimental study

Siddiqi, Hammad (2010): The relevance of coarse thinking for investors' willingness to pay: An experimental study.

Abstract

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
• Language: English
• 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

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