Testing alternative theories of financial decision making: an experimental study with lottery bonds

Patrick ROGER

Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) from Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg (France)

Abstract: In this article, a simple paper-and-pencil experiment, based on lottery bonds, shows that financial decisions taken by participants are inconsistent with the traditional view of economic agents as risk averse expected utility maximizers. First, our results cast doubt on the relevance of variance as a measure of risk and put to light the importance of skewness in decision making. The decisions taken by participants are consistent with the optimal distortion of beliefs introduced in Brunnemeier and Parker (2005) and Brunnemeier et al. (2007). As a by-product of this study, we also illustrate the fact that people use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.

Keywords: Lottery bonds; optimal beliefs; probability distortion; risk aversion. (search for similar items in EconPapers)
JEL-codes: D03 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:lar:wpaper:2009-08

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