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Evaluation Periods and Asset Prices in a Market Experiment

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  • Uri Gneezy
  • Arie Kapteyn
  • Jan Potters

Abstract

We test whether 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)), we 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. Copyright (c) 2003 by the American Finance Association.
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  • Uri Gneezy & Arie Kapteyn & Jan Potters, 2001. "Evaluation Periods and Asset Prices in a Market Experiment," Working Papers DRU-2801, RAND Corporation.
    • Handle: RePEc:ran:wpaper:dru-2801
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Uri Gneezy & Jan Potters, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 631-645.
    3. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
    4. Kahn, Alfred E, 1979. "Applications of Economics to an Imperfect World," American Economic Review, American Economic Association, vol. 69(2), pages 1-13, May.
    5. 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.
    6. 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.
    7. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    8. 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.
    9. 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.
    10. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-197, December.
    11. Conlisk, John, 1993. "The Utility of Gambling," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 255-275, June.
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