Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment
AbstractMullainathan 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13515.
Date of creation: 19 Feb 2009
Date of revision:
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; Insider Trading
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-28 (All new papers)
- NEP-CBE-2009-02-28 (Cognitive & Behavioural Economics)
- NEP-EXP-2009-02-28 (Experimental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
- 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.
- Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2006.
"Coarse Thinking and Persuasion,"
NBER Working Papers
12720, National Bureau of Economic Research, Inc.
- Siddiqi, Hammad, 2010. "Coarse thinking, implied volatility, and the valuation of call and put options," MPRA Paper 23261, University Library of Munich, Germany.
- Siddiqi, Hammad, 2011. "Thinking by analogy, systematic risk, and option prices," MPRA Paper 31316, University Library of Munich, Germany.
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