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Investment under Uncertainty: Testing the Options Model with Professional Traders

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  • John A. List
  • Michael S. Haigh

Abstract

An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the “bad news principle”: the downside investment state influences the investment decision whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, which is drawn from student and professional trader subject pools, is broadly consonant with the options model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16038.

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Date of creation: May 2010
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Publication status: published as John A. List & Michael S. Haigh, 2010. "Investment Under Uncertainty: Testing the Options Model with Professional Traders," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 974-984, 04.
Handle: RePEc:nbr:nberwo:16038

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  1. Michael Haigh & John List, 2005. "Do professional traders exhibit myopic loss aversion? An experimental analysis," Artefactual Field Experiments 00052, The Field Experiments Website.
  2. Gneezy, U. & Potters, J.J.M., 1996. "An experiment on risk taking and evaluation periods," Discussion Paper 1996-61, Tilburg University, Center for Economic Research.
  3. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
  4. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.
  5. John A. List, 2003. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," NBER Working Papers 9736, National Bureau of Economic Research, Inc.
  6. John A. List, 2006. "Using Hicksian Surplus Measures to Examine Consistency of Individual Preferences: Evidence from a Field Experiment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 115-134, 03.
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Cited by:
  1. Ryan Kellogg, 2010. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," NBER Working Papers 16541, National Bureau of Economic Research, Inc.
  2. Pütz, Alexander & Ruenzi, Stefan, 2010. "Overconfidence among professional investors: Evidence from mutual fund managers," CFR Working Papers 08-08 [rev.], University of Cologne, Centre for Financial Research (CFR).
  3. Al-Ubaydli, Omar & Boettke, Peter, 2010. "Markets as economizers of information: Field experimental examination of the “Hayek Hypothesis”," MPRA Paper 27660, University Library of Munich, Germany.
  4. Gong, Binglin & Lei, Vivian & Pan, Deng, 2013. "Before and after: The impact of a real bubble crash on investors’ trading behavior in the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 186-196.
  5. Fahr, René & Janssen, Elmar & Sureth, Caren, 2014. "Can tax rate increases foster investment under entry and exit flexibility? Insights from an economic experiment," arqus Discussion Papers in Quantitative Tax Research 166, arqus - Arbeitskreis Quantitative Steuerlehre.

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