Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/66860
Authors: 
Ensthaler, Ludwig
Nottmeyer, Olga
Weizsäcker, Georg
Year of Publication: 
2012
Series/Report no.: 
DIW Discussion Papers 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

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