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Probability distortions, collectivism, and international stock prices

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  • Hollstein, Fabian
  • Sejdiu, Vulnet

Abstract

There are substantial differences in the return premia due to probability distortions in individualist and collectivist cultures. Consistent with the substantially lesser degree of probabilistic thinking in collectivist cultures documented by the psychology literature, probability-distortion-related return premia are substantially higher there than in individualist cultures. Our methodology applies a novel composite probability distortion (CPD) score based on cumulative prospect theory and salience theory. This measure is priced among all size groups in the cross-section of international stock returns: low-CPD-score stocks are underpriced while those with high scores appear overpriced. Collectivism is the main driver of differences in the CPD premium across countries and U.S. states.

Suggested Citation

  • Hollstein, Fabian & Sejdiu, Vulnet, 2023. "Probability distortions, collectivism, and international stock prices," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:beexfi:v:39:y:2023:i:c:s2214635023000503
    DOI: 10.1016/j.jbef.2023.100836
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    More about this item

    Keywords

    Collectivism; Probability distortions; International stock returns; Salience theory; Cumulative prospect theory;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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