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BEHAVIORAL & EXPERIMENTAL FINANCE ABSTRACTS"Two Heads are Less Bubbly than One: Team Decision-Making in an Experimental Asset Market"
STEPHEN L. CHEUNG, University of Sydney - School of Economics and Political Science, Institute for the Study of Labor (IZA) We study the effect of team decision-making on bubbles and crashes in experimental asset markets of the kind introduced by Smith, Suchanek and Williams (1988). We find that populating such markets with teams of size two instead of individuals significantly reduces the severity of mispricing. In particular we observe that under our teams treatment, deviations in prices away from intrinsic value are significantly smaller in magnitude, shorter in duration and associated with lower volume and price volatility. We also find an unexpected gender effect in team composition, manifesting itself in more extreme - though not consistently more profitable - behaviour by all-male teams. Since these effects are not observed among male participants generally, we conjecture that they may be due to factors specific to the psychology of decision-making in male-dominated environments. "Forecasting Stock Market Returns: The Sum of the Parts is More than the Whole"
MIGUEL A. FERREIRA, Universidade Nova de Lisboa, European Corporate Governance Institute (ECGI) We propose separately forecasting the three components of stock market returns: dividend yield, earnings growth, and price-earnings ratio growth. We obtain out-of-sample R-square coefficients (compared to the historical mean) as high as 1.6% with monthly data and 16.9% with yearly data using the predictors most typically suggested in the literature. This compares with typically negative R-squares obtained in a similar experiment by others. An investor who timed the market using our approach would have had a certainty equivalent gain of as much as 2.3% per year and a Sharpe ratio 0.33 higher than possible using the historical mean. Our results are robust for international data as well. We conclude that there is substantial predictability in stock returns and that it would have been possible to time the market in real time. "Does Ambiguity Aversion Affect how Investors Respond to Analyst Forecasts?"
CONSTANTINOS ANTONIOU, Durham Business School A large behavioural literature finds that people are ambiguity averse. This means that in response to information that does not justify the formation of a single posterior distribution, they become pessimistic, and act as if the worst case distribution is the correct one. In this paper we examine whether this hypothesis holds true for investors’ response to analyst earnings forecasts. Our hypothesis is that in an impoverished information environment, when investors cannot separate accurate from inaccurate forecasts, they will become pessimistic, and treat downward forecasts as more reliable than they are and upward forecasts as less reliable. This leads prices to drift upwards following the initial impact. Our results confirm this “pessimism and-correction� hypothesis, and suggest that ambiguity aversion affects how investors respond to analyst forecasts. "Are CEOS Expected Utility Maximizers?"
JOHN A. LIST, University of Chicago - Department of Economics, National Bureau of Economic Research (NBER), Institute for the Study of Labor (IZA)
Are individuals expected utility maximizers? This question represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century's models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this study, we advance the literature by exploring CEO's preferences over small probability, high loss lotteries. Using undergraduate students as our experimental control group, we find that both our CEO and student subject pools exhibit frequent and large departures from expected utility theory. In addition, as the extreme payoffs become more likely CEOs exhibit greater aversion to risk. Our results suggest that use of the expected utility paradigm in decision making substantially underestimates society's willingness to pay to reduce risk in small probability, high loss events. | ||||||||||
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Solicitation of Abstracts
Behavioral and Experimental Finance publishes working and accepted paper abstracts covering all aspects of behavioral and experimental finance. Its mission is to foster a better understanding of those elements of human psychology, both cognitive (mental) and affective (emotional) that influence the decision making process. The journal provides promising new research to the academic and the Wall Street communities that incorporates the methods used in the behavioral disciplines and decision sciences with the ones from Standard Finance, so that decision makers and their judgments can be studied from individual, group, organizational, and market perspectives.
Distribution ServicesIf your organization is interested in increasing readership for its research by starting a Research Paper Series, or sponsoring a Subject Matter eJournal, please email: RPS@SSRN.com Distributed by:DirectorsFEN SUBJECT MATTER EJOURNALS MICHAEL C. JENSEN Please contact us at the above addresses with your comments, questions or suggestions for FEN-Sub. Advisory BoardBehavioral & Experimental Finance H. KENT BAKER ROBERT J. BLOOMFIELD WERNER F.M. DEBONDT MELISSA FINUCANE BARUCH FISCHHOFF DAVID A. HIRSHLEIFER DANIEL KAHNEMAN LISA A. KRAMER ANDREW W. LO RUTH H. LYTTON ELTON G. MCGOUN JOHN R. NOFSINGER TERRANCE ODEAN EDGAR E. PETERS RICHARD L. PETERSON HENRY O. PRUDEN HERSH SHEFRIN ANDREI SHLEIFER PAUL SLOVIC MEIR STATMAN LYNN A. STOUT MICHAL ANN STRAHILEVITZ RICHARD H. THALER ANNETTE VISSING-JORGENSEN JEFFREY WURGLER JASON ZWEIG
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