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The relevance of coarse thinking for investors' willingness to pay: An experimental study

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  • 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 hypothesis outperforms 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, 2010. "The relevance of coarse thinking for investors' willingness to pay: An experimental study," MPRA Paper 23924, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23924
    as

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    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. repec:bla:jfinan:v:59:y:2004:i:3:p:969-998 is not listed on IDEAS
    3. Siddiqi, Hammad, 2009. "Is the lure of choice reflected in market prices? Experimental evidence based on the 4-door Monty Hall problem," Journal of Economic Psychology, Elsevier, vol. 30(2), pages 203-215, April.
    4. 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.
    5. Linda Babcock & Xianghong Wang & George Loewenstein, 1996. "Choosing the Wrong Pond: Social Comparisons in Negotiations That Reflect a Self-Serving Bias," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(1), pages 1-19.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Coarse Thinking; Thinking-by-Analogy; Asset Pricing; Call Option;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G00 - Financial Economics - - General - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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