Pricing Indefinitely Lived Assets: Experimental Evidence

Abstract

We study indefinitely-lived assets in experimental markets and find that the traded prices of
these assets are on average about 40% of the risk neutral fundamental value. Neither uncertainty
about the value of total dividend payments nor horizon uncertainty about the duration of trade
can account for this low traded price, while the temporal resolution of payoff uncertainty plays a
crucial role. We show that an Epstein and Zin (1989) recursive preference specification together
with probability weighting can rationalize the low traded prices observed in our indefinitehorizon asset markets, while risk attitudes do not play such an important role.

Keywords: asset pricing, behavioral finance, experiments, indefinite horizon, random termination, risk and uncertainty, Epstein-Zin recursive preferences, probability weighting

JEL Classification: C91, C92, D81, G12