Do Institutional and Individual Investors Differ in Their Preference for Financial Skewness?

37 Pages Posted: 28 Aug 2012

See all articles by Kimberly F. Luchtenberg

Kimberly F. Luchtenberg

American University - Department of Finance and Real Estate

Michael Seiler

College of William and Mary - Finance

Date Written: August 26, 2012

Abstract

Employing a unique sample of individual and institutional investors, we conduct experiments to determine investors’ preference for (or indifference to) financial skewness. We present investors with a series of stocks with varying levels of skewness. Using Instant Response Devices, we then collect the investors’ choice to hold or sell each stock. Among stocks with equal expected returns, we find strong evidence that the sample investors use a prospect theory utility function rather than a mean-variance expected utility function to decide to sell or hold stocks. In the loss domain, we find that investors are ambivalent about the choice between positively and negatively skewed stocks. However, in the gain domain, we find that both individual and institutional investors prefer negatively skewed stocks – a contrast from previous research suggesting that individuals (and not institutional investors) prefer positive skewness. We also find evidence suggesting that reference points are important in financial decision-making.

Keywords: financial skewness, false reference points, prospect theory, lottery stocks

Suggested Citation

Luchtenberg, Kimberly F. and Seiler, Michael, Do Institutional and Individual Investors Differ in Their Preference for Financial Skewness? (August 26, 2012). Available at SSRN: https://ssrn.com/abstract=2136615 or http://dx.doi.org/10.2139/ssrn.2136615

Kimberly F. Luchtenberg

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

Register to save articles to
your library

Register

Paper statistics

Downloads
207
Abstract Views
908
rank
148,161
PlumX Metrics