1 / 10

Behavioral Finance

Behavioral Finance. Economics 437. Utility function issues. Endowment Effects Endowment Effect Status Quo Effect Intransitivities Allais Effect Time Consistency. Endowment Effect. Knetsch and Sinden (1984): $ 2 or a lottery ticket

sereno
Télécharger la présentation

Behavioral Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Behavioral Finance Economics 437

  2. Utility function issues • Endowment Effects • Endowment Effect • Status Quo Effect • Intransitivities • Allais Effect • Time Consistency

  3. Endowment Effect • Knetsch and Sinden (1984): $ 2 or a lottery ticket • Participants are “endowed” with either $ 2 or a lottery ticket. When offered to switch or trade, few chose to switch. • Kahneman, Knetsch and Thaler (1990) • Mugs and Pens

  4. Kahneman, Knetsch and Thaler (1990) • Mugs sell at Cornell bookstore for $ 6 • Give every other participant a mug, let everyone examine the mugs • Announce that there will be four market trials to determine the market price of the mugs, but only one trial, selected randomly, will be “binding” • What does economic theory predict will be the outcome? • When markets clear, mugs will be owned by those who value them the most • Divide the participants into “mug lovers” and “mug haters” (in equal numbers) • Since mugs were assigned at random, on average half of the mug lovers will be given a mug and half will not. This implies that half of the mugs should trade, with mug haters selling to mug lovers

  5. Kahneman, Knetsch and Thaler (1990) -- Conclusions • There were 22 mugs distributed, so the predicted number of trades was 11. • In the four market trials, trades were: 4, 1, 2 and 2 • Median owner was unwilling to sell for less than $ 5.25 • Median buyer was unwilling to pay more than $ 2.25 to $ 2.75

  6. Another Version of Same Experiment • 77 students at Simon Fraser U were randomly assigned to three situations: • Sellers, given an SFU coffee mug (then asked would they sell at prices ranging from $ .25 to $ 9.25) • Buyers (then asked would they buy at prices ranging from $ .25 to $ 9.25) • Choosers (then asked to choose either receiving a mug and receiving that amount of money for each price from $.25 to $ 9.25) • Result: • Note that sellers and choosers are in objectively identical situations • Median reservations prices: • Sellers $ 7.12; Choosers $ 3.12; Buyers $ 2.87 • Conclusion: low volume of trade is produced mainly by owner’s reluctance to part with their ‘endowment.’

  7. Similar Experiment: Pens vs Dollars Pens 5 Dollars $ 4.50

  8. Status Quo Effects • Samuelson and Zeckhauser (1988) • Subjects told: You inherit a large sum of money in cash. What to do, if choices are: moderate-risk company, high-risk company, treasury bills, municipal bonds • Same as above except: A significant portion of your inheritance is not in cash, but instead is invested in a moderate-risk company (assuming no taxes or transaction costs) • Second Experiment: new health care plans offered at Harvard (only new faculty accepted them – they were the default option for new faculty) • Hartman, Doane and Woo • A survey of California electric power consumers revealed two groups: those who felt they had very reliable service and those who had relatively unreliable service • Each group was asked to state a preference among six combinations of service reliabilities and rates (with one combination described as the status quo) (highest reliability with full rates; lowest reliability 30 percent discount in rates) • Results: • Highest reliability group: 60.2 % favored status quo; 5.7% chose lowest reliability • Lowest reliability group: 58.3 % favored status quo; 5.8% selected highest reliability

  9. Status Quo/Endowment Bias Commodity A From position t, X and Y are indifferent From position X, X is preferred to Y From position Y, Y is preferred to X X Y t Commodity B

  10. The End

More Related