IDEAS home Printed from https://ideas.repec.org/a/eee/joepsy/v33y2012i1p19-29.html
   My bibliography  Save this article

The relevance of thinking-by-analogy for investors’ willingness-to-pay: An experimental study

Author

Listed:
  • Siddiqi, Hammad

Abstract

People tend to think by analogies. We investigate whether thinking-by-analogy matters for investors’ willingness-to-pay for a risky asset in a laboratory experiment. We find that thinking-by-analogy has a strong influence when the assets in question have similar (but not identical) payoffs. The hypothesis of thinking-by-analogy or coarse thinking clearly outperforms other hypotheses including the hypothesis of arbitrage-free or rational pricing. When the similarity between the payoffs is reduced, the risk neutral and risk averse hypotheses outperform the hypothesis of thinking-by-analogy. Regardless of the similarity between the payoffs, the arbitrage-free or rational pricing remains the hypothesis with the worst performance.

Suggested Citation

  • Siddiqi, Hammad, 2012. "The relevance of thinking-by-analogy for investors’ willingness-to-pay: An experimental study," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 19-29.
    • Handle: RePEc:eee:joepsy:v:33:y:2012:i:1:p:19-29
    DOI: 10.1016/j.joep.2011.08.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167487011001267
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.joep.2011.08.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 577-619.
    2. Rockenbach, Bettina, 2004. "The behavioral relevance of mental accounting for the pricing of financial options," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 513-527, April.
    3. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    4. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
    5. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(2), pages 127-151, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Siddiqi, Hammad, 2014. "Analogy Making and the Structure of Implied Volatility Skew," MPRA Paper 60921, University Library of Munich, Germany.
    2. Siddiqi, Hammad, 2013. "Analogy Making in Complete and incomplete Markets: A New Model for Pricing Contingent Claims," Risk and Sustainable Management Group Working Papers 160608, University of Queensland, School of Economics.
    3. Siddiqi, Hammad, 2014. "Mental Accounting: A New Behavioral Explanation of Covered Call Performance," Risk and Sustainable Management Group Working Papers 162567, University of Queensland, School of Economics.
    4. Siddiqi, Hammad, 2014. "Anchoring Heuristic in Option Prices," MPRA Paper 66018, University Library of Munich, Germany, revised 15 Jul 2015.
    5. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call writing," MPRA Paper 62763, University Library of Munich, Germany.
    6. Siddiqi, Hammad, 2014. "The Financial Market Consequences of Growing Awareness: The Case of Implied Volatiltiy Skew," Risk and Sustainable Management Group Working Papers 162568, University of Queensland, School of Economics.
    7. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," Risk and Sustainable Management Group Working Papers 207677, University of Queensland, School of Economics.
    8. Siddiqi, Hammad, 2015. "Explaining the Smile in Currency Options: Is it Anchoring?," MPRA Paper 63528, University Library of Munich, Germany.
    9. Siddiqi, Hammad, 2015. "Analogy Based Valuation of Currency Options," MPRA Paper 62333, University Library of Munich, Germany.
    10. Siddiqi, Hammad, 2014. "Analogy Making and the Structure of Implied Volatility Skew," Risk and Sustainable Management Group Working Papers 187407, University of Queensland, School of Economics.
    11. Siddiqi, Hammad, 2013. "Analogy Making In Complete and Incomplete Markets: A New Model for Pricing Contingent Claims," Risk and Sustainable Management Group Working Papers 156934, University of Queensland, School of Economics.
    12. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic in Option Pricing," MPRA Paper 68595, University Library of Munich, Germany.
    13. Siddiqi, Hammad, 2013. "Mental Accounting: A Closed-Form Alternative to the Black Scholes Model," MPRA Paper 50759, University Library of Munich, Germany.
    14. Siddiqi, Hammad, 2015. "Analogy Based Valuation of Commodity Options," Risk and Sustainable Management Group Working Papers 197334, University of Queensland, School of Economics.
    15. Hammad, Siddiqi, 2015. "Index Option Returns from an Anchoring Perspective," MPRA Paper 65331, University Library of Munich, Germany.
    16. Siddiqi, Hammad, 2014. "Analogy Making and the Puzzles of Index Option Returns and Implied Volatility Skew: Theory and Empirical Evidence," Risk and Sustainable Management Group Working Papers 177302, University of Queensland, School of Economics.
    17. Siddiqi, Hammad, 2013. "Managing Option Trading Risk with Greeks when Analogy Making Matters," Risk and Sustainable Management Group Working Papers 160607, University of Queensland, School of Economics.
    18. Siddiqi, Hammad, 2013. "Analogy Making, Option Prices, and Implied Volatility," MPRA Paper 48862, University Library of Munich, Germany.
    19. Siddiqi, Hammad, 2015. "Analogy based Valuation of Commodity Options," MPRA Paper 61083, University Library of Munich, Germany.
    20. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," MPRA Paper 63218, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Grimm, Veronika & Mengel, Friederike, 2012. "An experiment on learning in a multiple games environment," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2220-2259.
    2. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    3. Siddiqi, Hammad, 2013. "Analogy Making, Option Prices, and Implied Volatility," MPRA Paper 48862, University Library of Munich, Germany.
    4. Arvid Hoffmann & Sam Henry & Nikos Kalogeras, 2013. "Aspirations as reference points: an experimental investigation of risk behavior over time," Theory and Decision, Springer, vol. 75(2), pages 193-210, August.
    5. Siddiqi, Hammad, 2010. "Coarse thinking, implied volatility, and the valuation of call and put options," MPRA Paper 23261, University Library of Munich, Germany.
    6. Gotfredsen, Andreas & Nielsen, Carsten S. & Sebald, Alexander C. & Webb, Edward J.D., 2021. "Manipulating perception: The effect of product similarity on valuations and markets," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 263-286.
    7. Kfir Eliaz & Ran Spiegler, 2011. "Consideration Sets and Competitive Marketing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 235-262.
    8. Christian Wolff & Thorsten Lehnert & Cokki Versluis, 2009. "A Cumulative Prospect Theory Approach to Option Pricing," LSF Research Working Paper Series 09-03, Luxembourg School of Finance, University of Luxembourg.
    9. Robert Sugden & Jiwei Zheng, 2018. "Do Consumers Take Advantage of Common Pricing Standards? An Experimental Investigation," Management Science, INFORMS, vol. 64(5), pages 2126-2143, May.
    10. Brookins, Philip & Lucas, Adriana & Ryvkin, Dmitry, 2014. "Reducing within-group overconfidence through group identity and between-group confidence judgments," Journal of Economic Psychology, Elsevier, vol. 44(C), pages 1-12.
    11. Siddiqi, Hammad, 2014. "Analogy Making and the Puzzles of Index Option Returns and Implied Volatility Skew: Theory and Empirical Evidence," Risk and Sustainable Management Group Working Papers 177302, University of Queensland, School of Economics.
    12. Siddiqi, Hammad, 2013. "Mental Accounting: A Closed-Form Alternative to the Black Scholes Model," MPRA Paper 50759, University Library of Munich, Germany.
    13. Siddiqi, Hammad, 2010. "The relevance of coarse thinking for investors' willingness to pay: An experimental study," MPRA Paper 23924, University Library of Munich, Germany.
    14. Giovanna Devetag & Sibilla Di Guida, 2010. "Feature-based Choice and Similarity in Normal-form Games: An Experimental Study," LEM Papers Series 2010/18, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    15. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2020. "Portfolio selection with mental accounts: An equilibrium model with endogenous risk aversion," Journal of Banking & Finance, Elsevier, vol. 110(C).
    16. Penczynski, Stefan P., 2016. "Persuasion: An experimental study of team decision making," Journal of Economic Psychology, Elsevier, vol. 56(C), pages 244-261.
    17. Siddiqi, Hammad, 2009. "Coarse Thinking and Pricing a Financial Option," MPRA Paper 21749, University Library of Munich, Germany.
    18. repec:oup:qjecon:v:128:y:2012:i:1:p:53-104 is not listed on IDEAS
    19. Siddiqi, Hammad, 2014. "Analogy Making and the Structure of Implied Volatility Skew," MPRA Paper 60921, University Library of Munich, Germany.
    20. Montero, Maria & Sheth, Jesal D., 2021. "Naivety about hidden information: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 92-116.
    21. Sibilla Di Guida & Giovanna Devetag, 2013. "Feature-Based Choice and Similarity Perception in Normal-Form Games: An Experimental Study," Games, MDPI, vol. 4(4), pages 1-19, December.

    More about this item

    Keywords

    Coarse thinking; Thinking-by-analogy; Asset pricing; Call option; Cognitive psychology;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G00 - Financial Economics - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:33:y:2012:i:1:p:19-29. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/joep .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.