Does the period over which individuals evaluate outcomes influence their investment in risky assets? Results from this study show that the more frequently returns are evaluated, the more risk averse investors will be. The results are in line with the behavioral hypothesis of "myopic loss aversion," which assumes that people are myopic in evaluating outcomes over time, and are more sensitive to losses than to gains. The results have relevance for the equity premium puzzle, and also for the marketing strategies of fund managers. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of t (This abstract was borrowed from another version of this item.)

An experiment on risk taking and evaluation periods

Probability weighting functions relate objective probabilities and their subjective weights, and play a central role in modeling choices under risk within cumulative prospect theory. While several different parametric forms have been proposed, their qualitative similarities make it challenging to discriminate among them empirically. In this paper, we use both simulation and choice experiments to investigate the extent to which different parametric forms of the probability weighting function can be discriminated using adaptive design optimization, a computer-based methodology that identifies and exploits model differences for the purpose of model discrimination. The simulation experiments show that the correct (data-generating) form can be conclusively discriminated from its competitors. The results of an empirical experiment reveal heterogeneity between participants in terms of the functional form, with two models (Prelec-2, Linear-in-Log-Odds) emerging as the most common best-fitting models. The findings shed light on assumptions underlying these models.

http://www-personal.umich.edu/~gonzo/papers/cavagnaro-etal-2013-weighting-function-ADO.pdf

Discriminating among probability weighting functions using adaptive design optimization

Rankings are pervasive in the finance industry, yet there is no research how they impact financial professionals? behavior. We run lab-in-the-field experiments with 657 profession- als, lab experiments with 432 students and collect survey evidence from 1,349 respondents to investigate how rank incentives affect investment decisions. We find that both rankings and tournament incentives increase risk-taking among underperforming professionals, but not among students. Rank-driven risk-taking is robust to various experimental settings, including private identity priming and framing, and related to preferences for relative per- formance, which we find to be stronger for professionals than for the general population and other competitive professions.

/pdf/rankings-and-risk-taking-in-the-finance-industry-39gxrajbhq.pdf

Rankings and Risk-Taking in the Finance Industry

We investigate the effect of key audit matters (KAM) in the auditor’s report as required by the new ISA 701. We consider investment professionals and non-professional investors in our experiments, ...

https://findresearcher.sdu.dk:8443/ws/files/172895306/Koehler_Ratzinger_Sakel_Theis_2020_accepted_manuscript.pdf

The Effects of Key Audit Matters on the Auditor’s Report’s Communicative Value: Experimental Evidence from Investment Professionals and Non-professional Investors

This target article is concerned with the implications of the surprisingly different experimental practices in economics and in areas of psychology relevant to both economists and psychologists, such as behavioral decision making. We consider four features of experimentation in economics, namely, script enactment, repeated trials, performance-based monetary payments, and the proscription against deception, and compare them to experimental practices in psychology, primarily in the area of behavioral decision making. Whereas economists bring a precisely defined “script” to experiments for participants to enact, psychologists often do not provide such a script, leaving participants to infer what choices the situation affords. By often using repeated experimental trials, economists allow participants to learn about the task and the environment; psychologists typically do not. Economists generally pay participants on the basis of clearly defined performance criteria; psychologists usually pay a flat fee or grant a fixed amount of course credit. Economists virtually never deceive participants; psychologists, especially in some areas of inquiry, often do. We argue that experimental standards in economics are regulatory in that they allow for little variation between the experimental practices of individual researchers. The experimental standards in psychology, by contrast, are comparatively laissez-faire. We believe that the wider range of experimental practices in psychology reflects a lack of procedural regularity that may contribute to the variability of empirical findings in the research fields under consideration. We conclude with a call for more research on the consequences of methodological preferences, such as the use on monetary payments, and propose a “do-it-both-ways” rule regarding the enactment of scripts, repetition of trials, and performance-based monetary payments. We also argue, on pragmatic grounds, that the default practice should be not to deceive participants.

Experimental practices in economics: A methodological challenge for psychologists?-Open Peer Commentary-Different perspective of human behavior entail different experimental practices

Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This article explores this question and measures prospect theory for a sample of private bankers and fund managers. We obtained clear support for prospect theory. Our financial professionals behaved according to prospect theory and violated expected utility maximization. They were risk averse for gains and risk seeking for losses and their utility was concave for gains and (slightly) convex for losses. They were also averse to losses, but less so than commonly observed in laboratory studies and assumed in behavioral finance. A substantial minority focused on gains and largely ignored losses, behavior reminiscent of what caused the current financial crisis.

/pdf/do-financial-professionals-behave-according-to-prospect-5vo0mp8gh2.pdf

Hilda Kammoun

Papers

Do financial professionals behave according to prospect theory? An experimental study

Do financial professionals behave according to prospect theory? An experimental study