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http://hdl.handle.net/10419/66860
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| Title: | | Hidden skewness  |
| Authors: | | Ensthaler, Ludwig Nottmeyer, Olga Weizsäcker, Georg |
| Issue Date: | | 2012 |
| Series/Report no.: | | Discussion Papers, German Institute for Economic Research, DIW Berlin 1238 |
| Abstract: | | Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. A simple laboratory experiment shows that participants either strongly underestimate skewness or ignore it completely. The participants' choices reveal bounds on their subjective medians of a financial asset's price that is subject to stochastic growth. The observed bias in expectations is irrespective to risk preferences and fairly robust to feedback. It is consistent with a behavioral model in which geometric growth is confused with linear growth. The bias is a possible explanation of investors' misunderstandings of real-world financial products like leveraged ETFs. |
| Subjects: | | skewness belief biases binomial tree |
| JEL: | | C91 D03 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Publikationen von Forscherinnen und Forschern des DIW DIW-Diskussionspapiere
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