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Testing alternative theories of financial decision making: an experimental study with lottery bonds

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  • Patrick Roger

    ()
    (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg)

Abstract

In this article, a simple paper-and-pencil experiment, based on lottery bonds, shows that financial decisions taken by participants are inconsistent with the traditional view of economic agents as risk averse expected utility maximizers. First, our results cast doubt on the relevance of variance as a measure of risk and put to light the importance of skewness in decision making. The decisions taken by participants are consistent with the optimal distortion of beliefs introduced in Brunnemeier and Parker (2005) and Brunnemeier et al. (2007). As a by-product of this study, we also illustrate the fact that people use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.

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Bibliographic Info

Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2009-08.

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Date of creation: 2009
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Handle: RePEc:lar:wpaper:2009-08

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Keywords: Lottery bonds; optimal beliefs; probability distortion; risk aversion.;

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