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Hindsight Bias and Individual Risk Attitude within the Context of Experimental Asset Markets

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  • Boris Maciejovsky

    ()

  • Tarek El-Sehitya
  • Hans Haumerb
  • Christian Helmensteinc
  • Erich Kirchlerd

Abstract

This paper investigates (i) the robustness of hindsight bias in experimental asset markets, (ii) the time invariance of the different experimental risk elicitation methods of certainty equivalents and binary lottery choices, and (iii) their correspondence. The results of our within-subjects approach with 133 traders do not support the conjecture that hindsight bias is a general phenomenon. Furthermore, our findings challenge the presumption of time-stable risk preferences and of procedural invariance with respect to different experimental risk elicitation methods.

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Bibliographic Info

Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2002-16.

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Length: 20 pages
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Handle: RePEc:esi:discus:2002-16

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Related research

Keywords: Hindsight bias; Risk attitude; Financial markets; Experimental economics; Behavioral finance;

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References

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  1. Christensen-Szalanski, Jay J. J. & Willham, Cynthia Fobian, 1991. "The hindsight bias: A meta-analysis," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 48(1), pages 147-168, February.
  2. Creyer, Elizabeth & William T., Jr. Ross, 1993. "Hindsight Bias and Inferences in Choice: The Mediating Effect of Cognitive Effort," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 55(1), pages 61-77, June.
  3. Fellner, Gerlinde & Maciejovsky, Boris, 2007. "Risk attitude and market behavior: Evidence from experimental asset markets," Journal of Economic Psychology, Elsevier, Elsevier, vol. 28(3), pages 338-350, June.
  4. Maciejovsky, B. & Kirchler, E., 2001. "Simultaneous Over-and Underconfidence: Evidence from Experimental Aseet Markets," Papers, Flinders of South Australia - Discipline of Economics 185, Flinders of South Australia - Discipline of Economics.
  5. Krahnen, Jan Pieter & Rieck, Christian & Theissen, Erik, 1997. "Messung individueller Risikoeinstellungen," CFS Working Paper Series 1997/03, Center for Financial Studies (CFS).
  6. Dennis Dittrich & Werner Güth & Boris Maciejovsky, . "Overconfidence in Investment Decisions: An Experimental Approach," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2001-03, Max Planck Institute of Economics, Strategic Interaction Group.
  7. Selten, Reinhard & Abdolkarim Sadrieh & Klaus Abbink, 1995. "Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Discussion Paper Serie B 343, University of Bonn, Germany.
  8. Mikhail & Plott, Charles R., 1995. "Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 909, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Walker, James M & Smith, Vernon L & Cox, James C, 1990. " Inducing Risk-Neutral Preferences: An Examination in a Controlled Market Environment," Journal of Risk and Uncertainty, Springer, Springer, vol. 3(1), pages 5-24, March.
  10. Cox, James C & Smith, Vernon L & Walker, James M, 1985. "Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk Aversion," American Economic Review, American Economic Association, vol. 75(2), pages 160-65, May.
  11. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
  12. Krahnen, Jan Pieter & Rieck, Christian & Theissen, Erik, 1997. "Inferring risk attitudes from certainty equivalents: Some lessons from an experimental study," Journal of Economic Psychology, Elsevier, Elsevier, vol. 18(5), pages 469-486, September.
  13. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
  14. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1775-1798, October.
  15. Stahlberg, Dagmar & Eller, Frank & Maass, Anne & Frey, Dieter, 1995. "We Knew It All Along: Hindsight Bias in Groups," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 63(1), pages 46-58, July.
  16. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(5), pages 1232-54, October.
  17. M. J. Brennan, 1995. "The Individual Investor," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(1), pages 59-74, 03.
  18. repec:wop:humbsf:2001-44 is not listed on IDEAS
  19. Rietz, Thomas A, 1993. " Implementing and Testing Risk-Preference-Induction Mechanisms in Experimental Sealed-Bid Auctions," Journal of Risk and Uncertainty, Springer, Springer, vol. 7(2), pages 199-213, October.
  20. Weber, Martin & Keppe, Hans-Jurgen & Meyer-Delius, Gabriela, 2000. "The impact of endowment framing on market prices -- an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 41(2), pages 159-176, February.
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Cited by:
  1. Barasinska, Nataliya & Schäfer, Dorothea & Stephan, Andreas, 2012. "Individual risk attitudes and the composition of financial portfolios: Evidence from German household portfolios," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 52(1), pages 1-14.
  2. Erich Kirchler & Boris Maciejovsky & Martin Weber, 2004. "Framing Effects, Selective Information and Market Behavior ­ An Experimental Analysis ­," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2004-16, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Gerlinde Fellner & Boris Maciejovsky, . "Risk Attitude and Market Behavior: Evidence from Experimental Asset Markets," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2002-34, Max Planck Institute of Economics, Strategic Interaction Group.

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