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Hidden Skewness

Author

Listed:
  • Ludwig Ensthaler
  • Olga Nottmeyer
  • Georg Weizsäcker

Abstract

Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. A simple laboratory experiment shows that participants either strongly underestimate skewness or ignore it completely. The participants' choices reveal bounds on their subjective medians of a financial asset's price that is subject to stochastic growth. The observed bias in expectations is irrespective to risk preferences and fairly robust to feedback. It is consistent with a behavioral model in which geometric growth is confused with linear growth. The bias is a possible explanation of investors' misunderstandings of real-world financial products like leveraged ETFs.

Suggested Citation

  • Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker, 2012. "Hidden Skewness," Discussion Papers of DIW Berlin 1238, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1238
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    References listed on IDEAS

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    More about this item

    Keywords

    Skewness; belief biases; binomial tree;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D3 - Microeconomics - - Distribution

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