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Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment

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Author Info
Siddiqi, Hammad

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Abstract

Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We test this hypothesis in an experiment on financial options against the benchmark of arbitrage-free pricing. Firstly, we test whether a financial option is priced in analogy with its underlying stock (transference). Secondly, we test for whether variations in the analogy between a financial option and its underlying stock matter (framing). We find evidence in support of both transference and framing.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13515.

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Date of creation: 19 Feb 2009
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Handle: RePEc:pra:mprapa:13515

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Related research
Keywords: Coarse Thinking; Financial Options; Arbitrage-Free Pricing;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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  1. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 577-619, 05. [Downloadable!] (restricted)
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  2. Rockenbach, Bettina, 2004. "The behavioral relevance of mental accounting for the pricing of financial options," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 513-527, April. [Downloadable!] (restricted)
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This page was last updated on 2009-11-26.

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