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Title:Hidden skewness PDF Logo
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:DIW-Diskussionspapiere
Publikationen von Forscherinnen und Forschern des DIW

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