Individual Preferences, Monetary Gambles and the Equity Premium
50 Pages Posted: 28 Sep 2003 Last revised: 27 Oct 2022
There are 2 versions of this paper
Individual Preferences, Monetary Gambles and the Equity Premium
Date Written: September 2003
Abstract
We argue that narrow framing, whereby an agent who is offered a new gamble evaluates that gamble in isolation, separately from other risks she already faces, may be a more important feature of decision-making under risk than previously realized. To demonstrate this, we present evidence on typical attitudes to independent monetary gambles with both large and small stakes and show that across a wide range of utility functions, including all expected utility and many non-expected utility specifications, the only ones that can easily capture these attitudes are precisely those exhibiting narrow framing. Our analysis also makes predictions about the kinds of preferences that might be able to address the stock market participation and equity premium puzzles. We illustrate these predictions in simple portfolio choice and equilibrium settings.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Andrew Ang, Geert Bekaert, ...
-
By Andrew Ang, Geert Bekaert, ...
-
Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing
By Nicholas Barberis, Ming Huang, ...
-
Optimal Portfolio Choice Under Loss Aversion
By Arjan B. Berkelaar, Roy Kouwenberg, ...
-
The Implications of First-Order Risk Aversion for Asset Market Risk Premiums
By Geert Bekaert, Robert J. Hodrick, ...
-
Portfolio Choice and Trading Volume with Loss Averse Investors
-
What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
By Nicholas Barberis and Wei Xiong
-
What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
By Nicholas Barberis and Wei Xiong
-
The Independence Axiom and Asset Returns
By Larry G. Epstein and Stanley E. Zin
-
Individual Preferences, Monetary Gambles and the Equity Premium
By Nicholas Barberis, Ming Huang, ...