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Abstract:
We examine the risky choices of contestants in the popular TV game show "Deal or No Deal" and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well-defined, and when large real monetary amounts are at stake.

Decision making under risk, Expected utility theory, Prospect theory

Abstract:
We examine framing effects by analyzing how risky choice depends on the absolute and relative size of the amounts at stake, using an extensive sample of choices from ten different editions of the large-stake TV game show Deal or No Deal. Our analyses within and across the samples suggest that risky choice is highly sensitive to the context, as defined by the initial set of prizes in the game. In each sample, contestants respond in a similar way to the stakes relative to their initial level, even though the initial level differs widely across the various editions. Amounts therefore appear to be primarily evaluated relative to a subjective frame of reference rather than in terms of their absolute monetary value.

Decision making under risk, Framing, Expected utility theory, Prospect theory

Abstract:
This survey introduces and reviews the field of behavioral finance. It outlines the traditional finance approach, which builds upon rational acting investors, its assumptions, and its shortcomings. Moreover, it surveys the main findings from psychology and sociology that contrast with this traditional finance approach, and it provides examples of situations and studies that reveal the relevance of these findings for financial markets and its participants.

behavioral finance, investor psychology, investor behavior, financial markets, market efficiency, individual decision making

Abstract:
We analyze risky choice using a series of laboratory and classroom experiments that mimic the popular TV game show "Deal or No Deal". This paper temporarily consists of a cover page only. We are working on large-scale experiments and will update the paper with our findings soon. The results from our first series of experiments (included in an earlier draft of this paper) are added to our study entitled "Deal or No Deal? Decision making under risk in a large-payoff game show" with Richard Thaler (http://ssrn.com/abstract=636508).

Decision making under risk, field experiment, laboratory experiment

Abstract:
A portfolio construction experiment reveals strong evidence for a conditional 1/n diversification heuristic. Subjects have a tendency to exclude choice alternatives that are unattractive when held in isolation, despite their attractive diversification benefits. Moreover, there is a tendency to divide available funds equally between the remaining alternatives. This strategy is applied even if it leads to allocations that are dominated by first-order stochastic dominance. In addition, framing the decision problem to emphasize potential diversification benefits leads to significantly improved allocations, and adding irrelevant choice alternatives influences portfolio allocations.

Diversification, framing, behavioural finance, experimental economics, 1/n heuristics, irrational behaviour, stochastic dominance

Abstract:
This study conducts a classroom experiment and an online experiment to examine individual decision-making under risk. Like Levy and Levy (2002), the experiment uses pairs of mixed gambles with moderate probabilities to avoid the framing effect and certainty affect that may affect non-mixed gambles with extreme probabilities. Also, we use Stochastic Dominance criteria to avoid parametric specification of decision-maker preferences. Explicitly accounting for the Wakker (2003) comment, we find several serious violations of Cumulative Prospect Theory (CPT). In fact, in a head-to-head competition between Second-order Stochastic Dominance (SSD) and CPT, most individuals choose the SSD alternative.

Cumulative prospect theory, expected utility, mixed gambles, probability weighting, stochastic dominance

Abstract:
Experiments frequently use a random incentive system (RIS), where only tasks that are randomly selected at the end of the experiment are for real. The most common type is applied within subjects and pays every subject one out of her multiple tasks (within-subjects randomization). Recently, a method has become popular where also a subset of subjects is randomly selected, and only these subjects receive real payments (between-subjects randomization). In earlier tests with simple, static tasks, RISs performed well. The present study investigates RISs in a more complex, dynamic choice experiment. We find that RISs increase the frequency of trembles. In addition, within-subjects randomization does not eliminate carry-over effects from previous tasks. Between-subjects randomization reduces risk aversion. These results suggest that caution is warranted when applying RISs to non-simple tasks.

Experiments, Incentives

Abstract:
The value premium substantially reduces for downside risk averse investors with a substantial fixed income exposure, such as insurance companies and pension funds. Growth stocks are attractive to these investors because they offer a good hedge against a bad bond performance. This result holds for evaluation horizons of around one year. Our findings cast doubt on the practical relevance of the value premium for such investors and reiterates the importance of the choice of the relevant test portfolio, risk measure and investment horizon in empirical tests of market efficiency and equilibrium.

downside risk, semi-variance, interest rates, fixed income, value premium, asset pricing, behavioral finance, bond returns

Abstract:
We study the portfolio construction decision of a typical investor and find strong evidence for a conditional 1/n diversification heuristic. Decision makers assign too much weight to the marginal distribution of an asset, while underweighting its diversification benefits. Moreover, there is a tendency to divide available funds equally between the remaining alternatives. This strategy is applied even if it leads to allocations that are dominated by first-order stochastic dominance. In addition, framing the decision problem to emphasize potential diversification benefits leads to significantly improved allocations, and adding irrelevant choice alternatives influences portfolio allocations.

diversification, framing, financial economics, naive diversification, 1/n heuristic, behavioral finance, bounded rationality