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Gambler's attention and the mean-variance relation: Evidence from China

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  • Yao, Jing
  • Wu, Lingyan

Abstract

Research from psychology suggests that gambler's fallacy and limited attention matter for individual decision making involving risk. We dub this combination “gambler's attention” and use it to provide a behavioral perspective on the debate over the market's mean-variance relation. A gambler's attention index is developed to divide the sample period into high-attention and low-attention regimes. Using data from China, we find clear-cut evidence that the market's mean-variance relation is significantly positive in low-attention periods but not in high-attention periods. The results are consistent with the notion that gambler's attention undermines an otherwise positive risk-return tradeoff in high-attention periods.

Suggested Citation

  • Yao, Jing & Wu, Lingyan, 2017. "Gambler's attention and the mean-variance relation: Evidence from China," Finance Research Letters, Elsevier, vol. 23(C), pages 233-238.
    • Handle: RePEc:eee:finlet:v:23:y:2017:i:c:p:233-238
    DOI: 10.1016/j.frl.2017.07.016
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    References listed on IDEAS

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    More about this item

    Keywords

    Limited attention; Gambler's fallacy; Risk-return tradeoff; Behavioral finance;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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