Investment Decisions and Time Horizon: Risk Perception and Risk Behavior in Repeated Gambles
University of Mannheim - Department of Business Administration and Finance, especially Banking
Elke U. Weber
Columbia Business School - Management & Psychology
University of Mannheim - Department of Banking and Finance
Management Science, Vol. 51, pp. 1777-1790, 2005
To investigate the effect of time horizon on investment behavior, this paper reports the results of an experiment in which business graduate students provided certainty equivalents and judged various dimensions of the outcome distribution of simple gambles that were played either once or repeatedly for 5 or 50 times. Systematic mistakes in the ex-ante estimations of the distributions of outcomes after (independent) repeated plays were observed. Despite correctly realizing that outcome standard deviation increases with the number of plays, respondents showed evidence of Samuelson's (1963) fallacy of large numbers. Perceived risk judgments showed only low correlations with standard deviation estimates, but were instead related to the anticipated probability of a loss (which was overestimated), mean excess loss, and the coefficient of variation. Implications for future research and practical implications for financial advisors are discussed.
Number of Pages in PDF File: 28Accepted Paper Series
Date posted: November 17, 2008 ; Last revised: August 31, 2011
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