The Relevance of Thinking by Analogy for Investors' Willingness to Pay: An Experimental Study
Posted: 9 Dec 2013
Date Written: February 1, 2012
People tend to think by analogies. We investigate whether thinking-by-analogy matters for investors’ willingness-to-pay for a risky asset in a laboratory experiment. We find that thinking-by-analogy has a strong influence when the assets in question have similar (but not identical) payoffs. The hypothesis of thinking-by-analogy or coarse thinking clearly outperforms other hypotheses including the hypothesis of arbitrage-free or rational pricing. When the similarity between the payoffs is reduced, the risk neutral and risk averse hypotheses outperform the hypothesis of thinking-by-analogy. Regardless of the similarity between the payoffs, the arbitrage-free or rational pricing remains the hypothesis with the worst performance.
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