Investment Decisions and Time Horizon: Risk Perception and Risk Behavior in Repeated Gambles
AbstractTo investigate the effect of time horizon on investment behavior, this paper reports the results of an experiment in which business graduate students provided certainty equivalents and judged various dimensions of the outcome distribution of simple gambles that were played either once or repeatedly for 5 or 50 times. Systematic mistakes in the ex-ante estimations of the distributions of outcomes after (independent) repeated plays were observed. Despite correctly realizing that outcome standard deviation increases with the number of plays, respondents showed evidence of Samuelson's (1963) fallacy of large numbers. Perceived risk judgments showed only low correlations with standard deviation estimates, but were instead related to the anticipated probability of a loss (which was overestimated), mean excess loss, and the coefficient of variation. Implications for future research and practical implications for financial advisors are discussed.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 51 (2005)
Issue (Month): 12 (December)
risk; risk perception; repeated gambles; investment decisions; time horizon;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2013.
"Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks,"
Discussion Papers of DIW Berlin
1337, DIW Berlin, German Institute for Economic Research.
- Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2014. "Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks," CESifo Working Paper Series 4760, CESifo Group Munich.
- Sergio Sousa, 2010. "Small-scale changes in wealth and attitudes toward risk," Discussion Papers 2010-11, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
- Martin Wallmeier, 2011. "Beyond payoff diagrams: how to present risk and return characteristics of structured products," Financial Markets and Portfolio Management, Springer, vol. 25(3), pages 313-338, September.
- Doerrenberg, Philipp & Duncan, Denvil & Zeppenfeld, Christopher, 2014. "Circumstantial Risk: Impact of Future Tax Evasion and Labor Supply Opportunities on Risk Exposure," IZA Discussion Papers 7917, Institute for the Study of Labor (IZA).
- Sachse, Katharina & Jungermann, Helmut & Belting, Julia M., 2012. "Investment risk – The perspective of individual investors," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 437-447.
- Menkhoff, Lukas & Schmeling, Maik & Schmidt, Ulrich, 2008.
"Are all professional investors sophisticated?,"
Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover
dp-397, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Doerrenberg, Philipp & Duncan, Denvil & Zeppenfeld, Christopher, 2014. "Circumstantial risk: Impact of future tax evasion and labor supply opportunities on risk exposure," ZEW Discussion Papers 14-014, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Hoffmann, Arvid O.I. & Pennings, Joost M.E., 2008. "Shareholder Activism and the Role of Marketing: A Framework for Analyzing and Managing Investor Relations," Research Memorandum 007, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Ensthaler, Ludwig & Nottmeyer, Olga & Weizsäcker, Georg, 2010.
IZA Discussion Papers
5109, Institute for the Study of Labor (IZA).
- Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker, 2010. "Hidden Skewness," Discussion Papers of DIW Berlin 1043, DIW Berlin, German Institute for Economic Research.
- Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker, 2012. "Hidden Skewness," Discussion Papers of DIW Berlin 1238, DIW Berlin, German Institute for Economic Research.
- Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 1-36, June.
- Steinhorst, Martin P. & Bahrs, Enno, 2011. "Die Analyse der Rationalität im Verhalten von Stakeholdern des Agribusiness anhand eines Experiments," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114490, German Association of Agricultural Economists (GEWISOLA).
- Michael L. DeKay & John C. Hershey & Mark D. Spranca, & Peter A. Ubel & David A. Asch, 2006. "Are medical treatments for individuals and groups like single-play and multiple-play gambles?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 1, pages 134-145, November.
- Alexander Klos, 2013. "Myopic loss aversion: Potential causes of replication failures," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(5), pages 617-629, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If references are entirely missing, you can add them using this form.