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

See all articles by Hammad Siddiqi

Hammad Siddiqi

University of the Sunshine Coast-School of Business

Date Written: March 30, 2012

Abstract

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.

Suggested Citation

Siddiqi, Hammad, Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment (March 30, 2012). The IUP Journal of Behavioral Finance, Vol. VIII, No. 2, pp. 58-69, June 2011, Available at SSRN: https://ssrn.com/abstract=2031397

Hammad Siddiqi (Contact Author)

University of the Sunshine Coast-School of Business ( email )

Brisbane, QLD 70010
Australia
+61404900497 (Phone)

HOME PAGE: http://www.usc.edu.au/staff-repository/dr-hammad-siddiqi

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