Does Investor Risk Perception Drive Asset Prices in Markets? Experimental Evidence

37 Pages Posted: 27 Jul 2017

See all articles by Juergen Huber

Juergen Huber

University of Innsbruck; University of Vienna - Department of Finance

Stefan Palan

University of Graz

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: July 24, 2017

Abstract

What people perceive as risk clearly goes beyond variance. Several papers have shown that, e.g., probability of loss plays a more prominent role in perceived risk than does variance. We are the first to explore how individual risk perception influences prices and trading behavior in a market setting by exposing subjects to a number of differently shaped return distributions which they then trade on. We first elicit subjects’ individual risk perceptions, finding results in line with earlier papers. We then let subjects trade assets with these return distributions on a continuous double auction market. In the markets we observe active trading and prices strongly driven by average risk perception. While standard finance theory predicts identical prices for most of our assets we find average prices to vary by up to 20 percent, with assets perceived as being less risky trading at significantly higher prices.

Keywords: Risk, Risk Perception, Asset Market, Experiment

JEL Classification: D81, G11

Suggested Citation

Huber, Juergen and Palan, Stefan and Zeisberger, Stefan, Does Investor Risk Perception Drive Asset Prices in Markets? Experimental Evidence (July 24, 2017). Available at SSRN: https://ssrn.com/abstract=3007878 or http://dx.doi.org/10.2139/ssrn.3007878

Juergen Huber (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

University of Vienna - Department of Finance ( email )

Bruenner Strasse 72
Vienna, 1210
Austria

Stefan Palan

University of Graz ( email )

Universitätsstraße 15/F2
Graz, 8010
Austria
+433163807306 (Phone)
+433163809580 (Fax)

HOME PAGE: http://academic.palan.biz

Stefan Zeisberger

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Zürich
Switzerland

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