Table of Contents

Formal Insurance and Informal Risk Sharing Dynamics

Wanchuan Lin, Peking University - Guanghua School of Management
Juanjuan Meng, Peking University - Guanghua School of Management
Xi Weng, Peking University

Taxes, Debt, Investments and the Choice of Business Form with Overconfident and Pessimistic Entrepreneurs

Anton Miglo, Birmingham City University
Magdalena Brodziak, Birmingham City University

Risk Attitudes and Digit Ratio (2D:4D): Evidence From Prospect Theory

Levent Neyse, German Institute for Economic Research (DIW Berlin), Kiel Institute for the World Economy
Ferdinand M. Vieider, Ghent University-Universiteit Gent
Patrick Ring, Kiel Institute for the World Economy
Catharina Probst, University of Kiel
Christian Kaernbach, University of Kiel
Thilo van Eimeren, University Hospital of Cologne
Ulrich Schmidt, Kiel Institute for the World Economy

Peer Effect on Consumer Default Decision: Evidence From Online Lending Platform

Emma Li, Department of Finance
Li Liao, Tsinghua University - PBC School of Finance
Zhengwei Wang, Tsinghua University - PBC School of Finance
Xincheng Wang, Tsinghua University - PBC School of Finance

Replication in Financial Economics

Campbell R. Harvey, Duke University - Fuqua School of Business, National Bureau of Economic Research (NBER), Duke Innovation & Entrepreneurship Initiative

The 'Future Is Now' Bias: Anchoring and (Insufficient) Adjustment When Predicting the Future from the Present

Julian Givi, West Virginia University
Jeff Galak, Carnegie Mellon University

Expectation Error

Xiao Zhang, University of Chicago - Booth School of Business

Social Trading at a Glance - A Performance Analysis of Signal Providers

Alexander Deneke, WHU - Otto Beisheim School of Management


"Formal Insurance and Informal Risk Sharing Dynamics" Free Download

WANCHUAN LIN, Peking University - Guanghua School of Management
JUANJUAN MENG, Peking University - Guanghua School of Management
XI WENG, Peking University

This paper investigates whether and how the crowding-out effect of formal insurance on informal risk sharing is mitigated by social preference change. We design a lab experiment in which formal insurance is introduced and removed unexpectedly in a repeated risk-sharing game. We find evidence of social preference change by showing that informal risk sharing is significantly improved after the removal of formal insurance, and the pattern mainly occurs when one subject obtains insurance but the other does not. Findings suggest that it is the insurance purchasers who take the initiative to share more risk for their partners. However, there is no significant improvement in informal risk sharing when insurance purchasing decisions are randomly computer generated. We propose a model based on guilt aversion to explain our findings.

"Taxes, Debt, Investments and the Choice of Business Form with Overconfident and Pessimistic Entrepreneurs" Free Download

ANTON MIGLO, Birmingham City University
MAGDALENA BRODZIAK, Birmingham City University

This article is the first to analyze the simultaneous choice of investment and organizational form using the behavioral finance approach. When entrepreneurs are rational, the choice of investment and organizational form is irrelevant in most cases. However, when entrepreneurs are overconfident/pessimistic, it leads to overinvestment/underinvestment. We show that a combination of corporate tax for limited liability businesses along with a universal personal income tax can improve the efficiency of decision-making and increase social surplus.

"Risk Attitudes and Digit Ratio (2D:4D): Evidence From Prospect Theory" Free Download

LEVENT NEYSE, German Institute for Economic Research (DIW Berlin), Kiel Institute for the World Economy
FERDINAND M. VIEIDER, Ghent University-Universiteit Gent
PATRICK RING, Kiel Institute for the World Economy
CATHARINA PROBST, University of Kiel
THILO VAN EIMEREN, University Hospital of Cologne
ULRICH SCHMIDT, Kiel Institute for the World Economy

Prenatal androgens have organizational effects on brain and endocrine system development, which may have a partial impact on economic decisions. Numerous studies investigated the relationship between prenatal testosterone and financial risk taking, yet results remain inconclusive. We suspect that this is due to difficulty in capturing risk preferences with expected utility based tasks. Prospect theory, on the other hand, suggests that risk preferences differ between gains, losses and mixed prospects, as well as for different probability levels. This study investigates the relationship between financial risk taking and 2D:4D, a putative marker of prenatal testosterone exposure, in the framework of prospect theory. We conducted our study with 350 participants from Caucasian and Asian ethnicities. We do not observe any significant relationship between 2D:4D and risk taking in neither of these domains and ethnicities.

"Peer Effect on Consumer Default Decision: Evidence From Online Lending Platform" Free Download

EMMA LI, Department of Finance
LI LIAO, Tsinghua University - PBC School of Finance
ZHENGWEI WANG, Tsinghua University - PBC School of Finance
XINCHENG WANG, Tsinghua University - PBC School of Finance

The existence of peer effect on financial decision is well documented in the literature. However, little is known about the peer effect on default choice of consumer credit. We fill this gap by using a novel data and research design constructed from a cash loan platform in China. We find the default decision of the peers who defaulted before the default of the borrower can predict the default choice of borrower. The likelihood of default of the borrower increases by approximately 16% as one more “Before� peers who has defaulted. However, the number of “After� peers is not significantly correlated with the default choice of borrower. The results provide evidence on the casual effect of peers default decision on borrower’s default decision and mitigate the effect from the similarity effect shared between borrowers and their peers.

"Replication in Financial Economics" Free Download

CAMPBELL R. HARVEY, Duke University - Fuqua School of Business, National Bureau of Economic Research (NBER), Duke Innovation & Entrepreneurship Initiative

The existing replication policies at top finance journals are far weaker than the policies at top economics journals. This paper explores both the costs and benefits of having a stronger replication policy in the context of my failed 2010 initiative to develop a unified policy across all top finance journals. For example, the most obvious cost of a replication policy is the additional burden it imposes on authors in answering questions about both the code and data. Indeed, this cost is disproportionately placed on our most productive researchers – potentially leading to less innovation. On the other hand, having a strong policy would likely reduce research misconduct – in particular, soft misconduct such as p-hacking. I present a framework to mitigate the costs associated with replication and maximize the benefits.

"The 'Future Is Now' Bias: Anchoring and (Insufficient) Adjustment When Predicting the Future from the Present" Free Download

JULIAN GIVI, West Virginia University
JEFF GALAK, Carnegie Mellon University

In the present research, we document a novel forecasting bias, which we term the “future is now� (FIN) bias. Specifically, we show that people tend to believe that the future will mirror the present, even when such a belief is unfounded. That is, people overestimate the chances that whatever is happening now, will happen in the future, even when the (known) explicit probabilities of future outcomes contradict such a belief. This appears to be driven by an anchoring and (insufficient) adjustment process, whereby initial beliefs about the future are heavily influenced by the present circumstances, and then subsequent beliefs are not sufficiently adjusted once the probabilities of future outcomes are learned. Across nine studies (employing over 3,800 participants), we demonstrate the FIN bias in a variety of forecasting contexts, show that it manifests in incentive compatible settings, and provide evidence in support of an anchoring and (insufficient) adjustment mechanistic account.

"Expectation Error" Free Download

XIAO ZHANG, University of Chicago - Booth School of Business

I backcast expectation errors of credit spreads via machine learning. I use newspapers over the past century to construct text-based expectations of credit spreads and study the relationship between expectation errors and business cycles. The main result is that overoptimism about future credit spreads predicts lower GDP growth and higher unemployment over the medium run, even after controlling for past and prevailing credit spreads. This finding suggests credit-market sentiment is an important driver of economic fluctuations. Consistent with this story, I also find both the amount of net debt issuance and the ratio of debt to equity issuance increase following periods of overoptimism.

"Social Trading at a Glance - A Performance Analysis of Signal Providers" Free Download

ALEXANDER DENEKE, WHU - Otto Beisheim School of Management

This study provides an overview of the characteristics of signal providers on social trading platforms, which are increasing in relevance supported by the fact that retail investors do not like to make investment decisions by themselves. Signal providers and receivers exist on the platform. We use a proprietary data set of one of the largest German social trading platforms. Signal providers are grouped to certain career levels, which represent a track record calculated with the help of certain performance and risk variables. Career level five represents the highest possible ranking. We show that signal providers in general neither outperform mutual funds nor the market. However, the motivation for signal receivers to go on social trading platforms should be the high transparency and simplicity to invest amongst others. Furthermore, the study's robustness check indicates that signal providers' investment strategies are not likely to be effected in times of high market volatility due to not investing in assets that are highly prone to market movements. This behaviour is shown by a factor analysis.


About this eJournal

This eJournal distributes working and accepted paper abstracts covering all aspects of behavioral and experimental finance. Its mission is to foster a better understanding of those elements of human psychology, both cognitive (mental) and affective (emotional) that influence the decision making process. The eJournal provides promising new research to the academic and the Wall Street communities that incorporates the methods used in the behavioral disciplines and decision sciences with the ones from Standard Finance, so that decision makers and their judgments can be studied from individual, group, organizational, and market perspectives.

Scholarly research in Behavioral and Experimental Finance strives for greater explanation and insight into finance and investments based on research from the social sciences. For instance, the origins of behavioral finance have a strong theoretical foundation in the fields of experimental and cognitive psychology, sociology, and behavioral economics. The eJournal hopes to foster better decision-making and bridge the gap with other disciplines by investigating how various cognitive processes and emotional factors may hinder or contribute to optimal decision making in finance and related fields with an interdisciplinary perspective including: financial psychology, behavioral accounting, economic psychology, psychological economics, behavioral economics, behavioral law, organizational behavior, and behavioral marketing.

This eJournal presents research on the behaviors and choices of experts, professionals, and novices in various investment and corporate financial settings. The scope of the eJournal includes research that utilizes research methods and new findings from psychological studies to describe the behavior of investors and financial markets. This eJournal includes experimental tests of all standard financial theory as well as conceptual and experimental papers that deal with departures from standard financial theories that assume rational, optimizing individuals. We also welcome working papers and accepted paper abstracts based on strong financial behavioral research methodology, replication studies, case studies, empirical works, book reviews, literature reviews, and survey articles.

Topic areas and specific examples include research in: psychology and finance, stock market psychology, investor behavior, behavioral corporate finance, behavioral public finance, bounded rationality, loss aversion, disposition effect, prospect theory, overconfidence, underconfidence, optimism, the psychology of intuitive judgment (heuristics and biases), limited attention and memory, information overload, optical illusions, Allais paradox, mental accounting, mental mistakes, wishful thinking, risk perception (perceived risk), risk tolerance, emotion (affect), feelings, mood, imagery, cognitive biases, personality traits, socioeconomic and demographic characteristics, regret theory, hindsight bias, tunnel vision, framing, anchoring, representativeness, availability, familiarity bias, home bias, confirmatory bias, cognitive dissonance, groupthink, group polarization, crowd psychology, illusion of control, law of small numbers, self-control, illusion of validity, fads and fashions, learning, fairness, the endowment effect, house money effect, illusion of truth, status quo bias, curse of knowledge, illusion of knowledge, behavioral portfolio theory, overreaction and underreaction, pump and dump, rare events, cascades, bubbles, panics, crashes, manias, greed, window dressing, weather bias, chaos theory, fuzzy logic, herding behavior, behavioral asset pricing, regression (reversion) to the mean, market inefficiencies, arbitrage, noise, market reactions to predictions and announcements, momentum trading and investment strategies, financial organizational irregularities, stock market anomalies, and contrarian investment styles.

Editor: Victor Ricciardi, Goucher College


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Advisory Board

Behavioral & Experimental Finance eJournal

University Professor of Finance, American University - Kogod School of Business

Professor of Accounting, Cornell University - Samuel Curtis Johnson Graduate School of Management

Richard H. Driehaus Professor of Finance, DePaul University - Driehaus Center for Behavioral Finance

Senior Fellow, East-West Center, Research Investigator, Kaiser Permanente - Center for Health Research

Howard Heinz University Professor, Department of Engineering and Public Policy, Institute for Politics and Strategy, Carnegie Mellon University

Professor & Merage Chair in Business Growth, Finance, University of California, Irvine - Paul Merage School of Business, Research Associate, NBER

Eugene Higgins Professor of Psychology and Professor of Public Affairs, Princeton University

Professor of Finance, University of Toronto - Rotman School of Management

Harris & Harris Group Professor, Massachusetts Institute of Technology (MIT) - Sloan School of Management, National Bureau of Economic Research (NBER), Principal Investigator, Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Professor, Virginia Polytechnic Institute & State University - Financial Planning

William H. Dunkak Professor of Finance, Bucknell University - Department of Management

William H. Seward Endowed Chair in Finance, University of Alaska Anchorage

Willis H. Booth Professor of Banking and Finance, University of California, Berkeley - Haas School of Business

Co-Director of Global Macro, First Quadrant, L.P.

Behavioral Finance Specialist, Market Psychology Consulting

Professor, Golden Gate University - Ageno School of Business

Mario L. Belotti Professor of Finance, Santa Clara University - Leavey School of Business

Professor of Economics, Harvard University - Department of Economics, Fellow, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

President, Decision Research, Professor, University of Oregon - Department of Psychology

Glenn Klimek Professor of Finance, Santa Clara University - Department of Finance

Distinguished Professor of Corporate and Business Law Jack G. Clarke Business Law, Cornell Law School - Jack G. Clarke Business Law Institute (deceased)

Marketing Faculty, University of Wollongong

Ralph and Dorothy Keller Distinguished Service Professor of Economics and Behavioral Science, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

National Bureau of Economic Research (NBER), Professor, University of California Berkeley, Haas School of Business

Nomura Professor of Finance, NYU Stern School of Business, National Bureau of Economic Research (NBER)

Personal Finance Columnist, The Wall Street Journal