Self-selection in risky financial decision-making: An experiment on framing and ?perceived loss? aversion
AbstractA major characteristic of financial markets is information asymmetry. To combat its problems principals can use screening. That is, they can offer the clients a menu of contracts and infer their risk level from their choices. If the pattern of choices that clients with different risk level make differs, there is self-selection of clients and screening occurs. We conduct an experiment to address an important question for such settings?does the framing of the offered menu of contracts interfere with the self-selection of clients? The answer is yes. In fact, subjects? choices shift when the same (positive) outcomes of the same menu of contracts are presented in two different frames. Since both frames differ in the ?perceived? reference-point, we propose a theoretical approach that initially follows Prospect Theory to explain our results. Subjects exhibit loss aversion in their perception and assessment of the positive outcomes below the reference-point, and self-selection fails to occur.
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Bibliographic InfoPaper provided by Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Doctorado Interuniversitarios (con mención de calidad de la ANECA) en "Economía de la Empresa", Universidades de Valladolid, Burgos, Salamanca y León (España). Hasta 2008, Programa de Doctorado Interuniversitario (con mención de calidad de la ANECA) “Nuevas Tendencias en Dirección de Empresas”, Universidades de Valladolid, Burgos y Salamanca (España). in its series Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". with number 2010-07.
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Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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