Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment
The IUP Journal of Behavioral Finance, Vol. VIII, No. 2, pp. 58-69, June 2011
Posted: 30 Mar 2012
Date Written: March 30, 2012
Mullainathan et al. (2008) present a model of coarse thinking or analogy-based thinking. The essential idea behind coarse thinking is that people put situations into categories, and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. This hypothesis is tested in an experiment on financial options against the benchmark of arbitrage-free pricing. First, whether a financial option is priced in analogy with its underlying stock (transference) is tested. Second, variations in the analogy between a financial option and its underlying stock matter (framing) are tested. The results show evidence in support of both transference and framing.
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