The relevance of thinking-by-analogy for investors’ willingness-to-pay: An experimental study

Hammad Siddiqi ()

Journal of Economic Psychology, 2012, vol. 33, issue 1, 19-29

Abstract: People tend to think by analogies. We investigate whether thinking-by-analogy matters for investors’ willingness-to-pay for a risky asset in a laboratory experiment. We find that thinking-by-analogy has a strong influence when the assets in question have similar (but not identical) payoffs. The hypothesis of thinking-by-analogy or coarse thinking clearly outperforms other hypotheses including the hypothesis of arbitrage-free or rational pricing. When the similarity between the payoffs is reduced, the risk neutral and risk averse hypotheses outperform the hypothesis of thinking-by-analogy. Regardless of the similarity between the payoffs, the arbitrage-free or rational pricing remains the hypothesis with the worst performance.

Keywords: Coarse thinking; Thinking-by-analogy; Asset pricing; Call option; Cognitive psychology (search for similar items in EconPapers)
JEL-codes: C91 G00 G11 G12 G13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:33:y:2012:i:1:p:19-29

DOI: 10.1016/j.joep.2011.08.008

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