The relevance of coarse thinking for investors' willingness to pay: An experimental study
AbstractPeople tend to think by analogies. We investigate whether thinking-by-analogy matters for investors’ willingness to pay for a risky asset in a laboratory experiment. We find that thinking-by-analogy has a strong influence when the assets in question have similar (but not identical) payoffs. The hypothesis of thinking-by-analogy or coarse thinking clearly outperforms other hypotheses including the hypothesis of arbitrage-free or rational pricing. When the similarity between the payoffs is reduced, the risk neutral hypothesis outperforms the hypothesis of thinking-by-analogy. Regardless of the similarity between the payoffs, the arbitrage-free or rational pricing remains the hypothesis with the worst performance.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 23924.
Date of creation: 02 Jul 2010
Date of revision:
Coarse Thinking; Thinking-by-Analogy; Asset Pricing; Call Option;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- G00 - Financial Economics - - General - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
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- Shleifer, Andrei & Mullainathan, Sendhil & Schwartzstein, Joshua, 2008.
"Coarse Thinking and Persuasion,"
11022284, Harvard University Department of Economics.
- Siddiqi, Hammad, 2009. "Is the lure of choice reflected in market prices? Experimental evidence based on the 4-door Monty Hall problem," Journal of Economic Psychology, Elsevier, vol. 30(2), pages 203-215, April.
- 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.
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