Too risky to hedge: An experiment on narrow bracketing

Jiakun Zheng and Ling Zhou
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Jiakun Zheng: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique
Ling Zhou: School of Economics, Shanghai University of Finance and Economics

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Abstract: Narrow bracketers who are myopic in specific decisions would fail to consider preexisting risks in investment and neglect hedging opportunities. Growing evidence has demonstrated the relevance of narrow bracketing. We take a step further in empirical investigation and study individual heterogeneity in narrow bracketing. Specifically, we use a lab experiment in investment and hedging that elicits subjects' preferences on rich occasions to uncover the individual degree of narrow bracketing without imposing distributional assumptions. Combining prospect theory and narrow bracketing can explain our findings: Subjects who invest more also insure more, and subjects insure significantly less in the loss domain than in the gain domain. More importantly, we show that the distribution of the individual degree of narrow bracketing is skewed at two extremes, yet with a substantial share of people in the middle who partially suffer from narrow bracketing. Neglecting this aspect, we would overestimate the severity of narrow bracketing and misinterpret its relation with individual characteristics.

Keywords: Hedging; Narrow bracketing; Prospect theory; Subject heterogeneity (search for similar items in EconPapers)
Date: 2025-04-10
Note: View the original document on HAL open archive server: https://hal.science/hal-05063379v1
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Published in Experimental Economics, 2025, pp.1 - 27. ⟨10.1017/eec.2025.1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05063379

DOI: 10.1017/eec.2025.1

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