Hidden Skewness

26 Pages Posted: 1 Sep 2012

See all articles by Ludwig Ensthaler

Ludwig Ensthaler

Humboldt University of Berlin - School of Business and Economics; German Institute for Economic Research (DIW Berlin)

Olga Nottmeyer

IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)

Georg Weizsäcker

German Institute for Economic Research (DIW Berlin)

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2012

Abstract

Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. A simple laboratory experiment shows that participants either strongly underestimate skewness or ignore it completely. The participants' choices reveal bounds on their subjective medians of a financial asset's price that is subject to stochastic growth. The observed bias in expectations is irrespective to risk preferences and fairly robust to feedback. It is consistent with a behavioral model in which geometric growth is confused with linear growth. The bias is a possible explanation of investors' misunderstandings of real-world financial products like leveraged ETFs.

Keywords: Skewness, belief biases, binomial tree

JEL Classification: C91, D03

Suggested Citation

Ensthaler, Ludwig and Nottmeyer, Olga and Weizsäcker, Georg, Hidden Skewness (August 1, 2012). DIW Berlin Discussion Paper No. 1238. Available at SSRN: https://ssrn.com/abstract=2138821 or http://dx.doi.org/10.2139/ssrn.2138821

Ludwig Ensthaler

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Olga Nottmeyer

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Georg Weizsäcker (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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