Probability Distortions, Collectivism, and International Stock Prices

Journal of Behavioral and Experimental Finance, forthcoming

81 Pages Posted: 7 Jan 2021 Last revised: 7 Aug 2023

See all articles by Fabian Hollstein

Fabian Hollstein

Saarland University

Vulnet Sejdiu

Leibniz Universität Hannover

Date Written: November 25, 2020

Abstract

There are substantial differences in the return premia due to probability distortions in individualist and collectivist cultures. Consistent with the substantially lesser degree of probabilistic thinking in collectivist cultures documented by the psychology literature, probability-distortion-related return premia are substantially higher there than in individualist cultures. Our methodology applies a novel composite probability distortion (CPD) score based on cumulative prospect theory and salience theory. This measure is priced among all size groups in the cross-section of international stock returns: low-CPD-score stocks are underpriced while those with high scores appear overpriced. Collectivism is the main driver of differences in the CPD premium across countries and U.S. states.

Keywords: Collectivism, probability distortions, international stock returns, salience theory, cumulative prospect theory

JEL Classification: G40, G15, G12, Z10

Suggested Citation

Hollstein, Fabian and Sejdiu, Vulnet, Probability Distortions, Collectivism, and International Stock Prices (November 25, 2020). Journal of Behavioral and Experimental Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3737342 or http://dx.doi.org/10.2139/ssrn.3737342

Fabian Hollstein (Contact Author)

Saarland University ( email )

Campus
Saarbrucken, Saarland D-66123
Germany

Vulnet Sejdiu

Leibniz Universität Hannover ( email )

Königsworther Platz 1
Hannover, 30167
Germany

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