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Investment Under Uncertainty: Testing the Options Model with Professional Traders

Author

Listed:
  • John A. List

    (University of Chicago and NBER)

  • Michael S. Haigh

    (Commodities Future Trading and Commission)

Abstract

An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the bad news principle: the downside investment state influences the investment decision, whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, drawn from student and professional trader subject pools, is broadly consonant with the options model. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • John A. List & Michael S. Haigh, 2010. "Investment Under Uncertainty: Testing the Options Model with Professional Traders," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 974-984, November.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:4:p:974-984
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alexander Puetz & Stefan Ruenzi, 2011. "Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(5-6), pages 684-712, June.
    2. Al-Ubaydli, Omar & Boettke, Peter, 2010. "Markets as economizers of information: Field experimental examination of the “Hayek Hypothesis”," MPRA Paper 27660, University Library of Munich, Germany.
    3. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    4. Fahr, René & Janssen, Elmar & Sureth, Caren, 2014. "Can tax rate increases foster investment under entry and exit flexibility? Insights from an economic experiment," arqus Discussion Papers in Quantitative Tax Research 166, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Omar Al-Ubaydli & John A. List, 2016. "Field Experiments in Markets," NBER Working Papers 22113, National Bureau of Economic Research, Inc.
    6. Gong, Binglin & Lei, Vivian & Pan, Deng, 2013. "Before and after: The impact of a real bubble crash on investors’ trading behavior in the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 186-196.

    More about this item

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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