The Relevance of Thinking by Analogy for Investors' Willingness to Pay: An Experimental Study

Posted: 9 Dec 2013

See all articles by Hammad Siddiqi

Hammad Siddiqi

University of the Sunshine Coast-School of Business

Date Written: February 1, 2012

Abstract

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.

Suggested Citation

Siddiqi, Hammad, The Relevance of Thinking by Analogy for Investors' Willingness to Pay: An Experimental Study (February 1, 2012). Journal of Economic Psychology, Vol. 33, Issue 1, 2012. Available at SSRN: https://ssrn.com/abstract=2364877

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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