Hidden Skewness

Ludwig Ensthaler, Olga Nottmeyer and Georg Weizsäcker

No 1238, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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.

Keywords: Skewness; belief biases; binomial tree (search for similar items in EconPapers)
JEL-codes: C91 D3 (search for similar items in EconPapers)
Pages: 16 : Anh. p.
Date: 2012
New Economics Papers: this item is included in nep-exp and nep-upt
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Related works:
Working Paper: Hidden Skewness (2010)
Working Paper: Hidden Skewness (2010)
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