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Evaluation Periods and Assett Prices in a Market Experiment

  • Uri Gneezy
  • Arie Kapteyn
  • Jan Potters

The authors test the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change the portfolio influence her risk attitude in markets. In line with the prediction of Myopic Loss Aversion (Benartzi and Thaler, 1995), the authors find that more information and more flexibility result in less risk taking. Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced. This result supports the findings from individual decision-making, and shows that market interactions do not eliminate such behavior or its consequences for prices.

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Paper provided by RAND Corporation Publications Department in its series Working Papers with number 02-02.

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Length: 30 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:ran:wpaper:02-02
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  1. Kahn, Alfred E, 1979. "Applications of Economics to an Imperfect World," American Economic Review, American Economic Association, vol. 69(2), pages 1-13, May.
  2. Gneezy, U. & Potters, J.J.M., 1997. "An experiment on risk taking and evaluation periods," Other publications TiSEM da6ba1bf-e15c-41b2-ae95-c, Tilburg University, School of Economics and Management.
  3. Knez, Peter & Smith, Vernon L & Williams, Arlington W, 1985. "Individual Rationality, Market Rationality, and Value Estimation," American Economic Review, American Economic Association, vol. 75(2), pages 397-402, May.
  4. repec:tpr:qjecon:v:116:y:2001:i:1:p:261-292 is not listed on IDEAS
  5. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-97, December.
  6. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  7. Gollier, Christian & Lindsey, John & Zeckhauser, Richard J., 1997. "Investment Flexibility and the Acceptance of Risk," Journal of Economic Theory, Elsevier, vol. 76(2), pages 219-241, October.
  8. Camerer, Colin, 1992. "The rationality of prices and volume in experimental markets," Organizational Behavior and Human Decision Processes, Elsevier, vol. 51(2), pages 237-272, March.
  9. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  10. Nicholas Barberis & Ming Huang & Tano Santos, . "Prospect Theory and Asset Prices," CRSP working papers 494, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  11. repec:tpr:qjecon:v:112:y:1997:i:2:p:647-61 is not listed on IDEAS
  12. Langer, Thomas & Weber, Martin, 1999. "Prospect-Theory, Mental Accounting and Differences in Aggregated and Segregated Evaluation of Lottery Portfolios," Sonderforschungsbereich 504 Publications 99-64, Sonderforschungsbereich 504, Universit├Ąt Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  13. repec:tpr:qjecon:v:110:y:1995:i:1:p:73-92 is not listed on IDEAS
  14. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
  15. Conlisk, John, 1993. " The Utility of Gambling," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 255-75, June.
  16. Weber, Martin & Keppe, Hans-Jurgen & Meyer-Delius, Gabriela, 2000. "The impact of endowment framing on market prices -- an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 41(2), pages 159-176, February.
  17. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  18. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  19. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
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