Taring All Investors with the Same Brush? Evidence for Heterogeneity in Individual Preferences from a Maximum Likelihood Approach

SAFE Working Paper No. 147

61 Pages Posted: 1 Oct 2016 Last revised: 16 Apr 2019

See all articles by Andreas Hackethal

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE

Sven Thorsten Jakusch

Goethe University Frankfurt - Department of Finance

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Date Written: May 19, 2015

Abstract

Abstract. Microeconomic modeling of investors behavior in financial markets and its results crucially depends on assumptions about the mathematical shape of the underlying preference functions as well as their parameterizations. With the purpose to shed some light on the question, which preferences towards risky financial outcomes prevail in stock markets, we adopted and applied a maximum likelihood approach from the field of experimental economics on a randomly selected dataset of 656 private investors of a large German discount brokerage firm. According to our analysis we find evidence that the majority of these clients follow trading patterns in accordance with prospect theory (Kahneman and Tversky (1979)). We also find that observable sociodemographic and personal characteristics such as gender or age do not seem to correlate with specific preference types. Extended likelihood analysis indicates a moderate impact of preferences on trading decisions of individual investors, which increases if the underlying utility function is prospect theory. Regression analysis reveals that the impact of preferences on an investors’ trading behavior is not connected to most personal characteristics, but seems to be related to round-trip length and the type of the utility function.

Keywords: Utility Theory, Maximum Likelihood, Individual Investors

JEL Classification: C35, C51, C52, G02, G11

Suggested Citation

Hackethal, Andreas and Jakusch, Sven Thorsten and Meyer, Steffen, Taring All Investors with the Same Brush? Evidence for Heterogeneity in Individual Preferences from a Maximum Likelihood Approach (May 19, 2015). SAFE Working Paper No. 147. Available at SSRN: https://ssrn.com/abstract=2845866 or http://dx.doi.org/10.2139/ssrn.2845866

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Sven Thorsten Jakusch (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17
Frankfurt, 60054
Germany

Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

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