Abstract

http://ssrn.com/abstract=912778
 
 

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Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing


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)


American Economic Review, Vol. 96, No. 4, September 2006

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 than previously realized. Our starting point is the evidence that people are often averse to a small, independent gamble, even when the gamble is actuarially favorable. We find that a surprisingly wide range of utility functions, including many non-expected utility specifications, have trouble explaining this evidence; but that this difficulty can be overcome by allowing for narrow framing. Our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle, as well as other related financial puzzles. We confirm these predictions in a simple portfolio choice setting.

Number of Pages in PDF File: 33

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

JEL Classification: D1, D8, G11, G12

Accepted Paper Series


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Date posted: July 10, 2006  

Suggested Citation

Barberis, Nicholas and Huang, Ming and Thaler, Richard H., Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing. American Economic Review, Vol. 96, No. 4, September 2006. Available at SSRN: http://ssrn.com/abstract=912778

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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