Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/88150
Authors: 
Ensthaler, Ludwig
Nottmeyer, Olga
Weizsäcker, Georg
Zankiewicz, Christian
Year of Publication: 
2013
Series/Report no.: 
DIW Discussion Papers 1337
Abstract: 
Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. In a number of incentivized laboratory experiments we show that a large majority of participants either strongly underestimate skewness or ignore it completely. Participants misperceive the outcome distribution's spread to be far too narrow-band and they estimate the median to lie too close to the distribution's center. 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 misperception is a possible explanation of investors' difficulties with real-world financial products like leveraged ETFs.
Subjects: 
Behavioral Economics
Irrational Expectations
Binomial Tree
JEL: 
C91
D03
D14
G02
Document Type: 
Working Paper

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