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Satisficing in Financial Decision Making A Theoretical and Experimental Attempt to Explore Bounded Rationality

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  • Gerlinde Fellner

    ()

  • Werner Güth

    ()

  • Boris Maciejovsky

Abstract

In this paper, we apply the bounded rationality approach to an investment situation. In a simple setting where an investor decides between a riskless bond and a risky asset, we distinguish three aspiration levels: a lowest threshold which one wants to guarantee, the aspiration level given by investing all risk-free, and an even higher return level representing a real success. The ranges for such aspirations are naturally determined by the parameters. These three aspirations allow us to classify investors as actual or only potential satisficers, as well as risk shy or more open to risk. In the experiment, participants are first asked for their lowest and highest aspiration before investing. Thus, we can test whether they behave as predicted by their aspiration type. By presupposing specific cardinal utility functions, we also compare the bounded rationality approach to the rational choice-approach.

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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 2005-23.

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Length: 28 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:esi:discus:2005-23

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References

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  1. Dennis Dittrich & Werner Guth & Boris Maciejovsky, 2005. "Overconfidence in investment decisions: An experimental approach," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(6), pages 471-491.
  2. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  3. Selten, Reinhard, . "Features of Experimentally Observed Bounded Rationality," Discussion Paper Serie B 421, University of Bonn, Germany, revised Nov 1997.
  4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
  5. Tietz, Reinhard, 1992. "Semi-normative theories based on bounded rationality," Journal of Economic Psychology, Elsevier, Elsevier, vol. 13(2), pages 297-314, June.
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Cited by:
  1. Werner Güth & Ev Martin & Torsten Weiland, 2006. "Aspiration formation and satisficing in isolated and competitive search," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-26, Max Planck Institute of Economics, Strategic Interaction Group.
  2. Werner Güth & M. Vittoria Levati & Matteo Ploner, 2006. "Is Satisficing Absorbable? - An Experimental Study," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-10, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Werner Güth, 2006. "Satisficing in Portfolio Selection - Theoretical Aspects and Experimental Tests," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-16, Max Planck Institute of Economics, Strategic Interaction Group.
  4. Werner Güth & Gerlinde Fellner & Ev Martin, 2006. "Satisficing or Optimizing? - An Experimental Study," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-11, Max Planck Institute of Economics, Strategic Interaction Group.
  5. Siegfried Berninghaus & Werner Güth & M. Vittoria Levati & Jianying Qiu, 2006. "Satisficing in sales competition: experimental evidence," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-32, Max Planck Institute of Economics, Strategic Interaction Group.
  6. Werner Güth & Gerlinde Fellner & Ev Martin, 2006. "Task Transcending Satisficing - An Experimental Study," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-09, Max Planck Institute of Economics, Strategic Interaction Group.
  7. Werner Güth, 2009. "Optimal gelaufen, einfach zufrieden oder unüberlegt gehandelt? Zur Theorie (un)eingeschränkt rationalen Entscheidens," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 10(s1), pages 75-100, 05.

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