Craving for Financial Returns? Empirical Evidence from the Laboratory and the Field

Abstract

In a series of controlled laboratory experiments, we provide evidence for “Craving by Design” (CbD) theory, where people knowingly expose themselves to negative tail risk due to craving for monetary gains. We then document the “cheap call selling anomaly:” selling calls priced below 1Ams $ has consistently delivered negative long-term returns and negative skew, which is a puzzle when viewed from prevailing finance theories but a matter of course under CbD theory. These findings raise new questions about the motivations underlying investor decisions, the return properties of option markets, and the issue of problem gambling under repeated monetary gambles.

Keywords: Tail Risk, Self-Control, Craving, Gambling, Neurofinance

JEL Classification: C91, D83, D87, G02, G11