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Projection bias by investors: A market approach

  • Kliger, Doron
  • Levy, Ori

Decision makers often fail to forecast their future feeling, erroneously projecting current preferences onto future preferences, an attribute recently labeled "projection bias" [Loewenstein, G., O'Donoghue, T., Rabin, M., 2003. Projection bias in predicting future utility. Quarterly Journal of Economics 118, 1209-1248]. There is sweeping psychological evidence for the existence of projection bias. Still, a scrutiny of projection bias based on real (rather than experimental) data is lacking. This paper devises and implements such a framework. Using US asset market data, our statistical findings unequivocally support the existence of projection bias in investors' decision-making processes.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 66 (2008)
Issue (Month): 3-4 (June)
Pages: 657-668

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Handle: RePEc:eee:jeborg:v:66:y:2008:i:3-4:p:657-668
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  2. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
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  9. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
  10. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-51.
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