Abstract

http://ssrn.com/abstract=446240
 
 

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Individual Preferences, Monetary Gambles and the Equity Premium


Nicholas Barberis


Yale School of Management; National Bureau of Economic Research (NBER)

Ming Huang


Cornell University - Samuel Curtis Johnson Graduate School of Management

Richard H. Thaler


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

September 2003

AFA 2004 San Diego Meetings

Abstract:     
We argue that narrow framing, whereby an agent who is offered a new gamble evaluates that gamble in isolation, separately from other risks she already faces, may be a more important feature of decision-making under risk than previously realized. To demonstrate this, we present evidence on typical attitudes to independent monetary gambles with both large and small stakes and show that across a wide range of utility functions, including all expected utility and many non-expected utility specifications, the only ones that can easily capture these attitudes are precisely those exhibiting narrow framing. Our analysis also makes predictions about the kinds of preferences that might be able to address the stock market participation and equity premium puzzles. We illustrate these predictions in simple portfolio choice and equilibrium settings.

Number of Pages in PDF File: 49

Keywords: risk aversion, framing, loss aversion, stock market participation, equity premium

JEL Classification: D1, D8, G11, G12

working papers series


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Date posted: October 14, 2003  

Suggested Citation

Barberis, Nicholas and Huang, Ming and Thaler, Richard H., Individual Preferences, Monetary Gambles and the Equity Premium (September 2003). AFA 2004 San Diego Meetings. Available at SSRN: http://ssrn.com/abstract=446240 or http://dx.doi.org/10.2139/ssrn.446240

Contact Information

Nicholas Barberis (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ming Huang
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-225-9594 (Phone)
Richard H. Thaler
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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