Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment

Hammad Siddiqi ()

MPRA Paper from University Library of Munich, Germany

Abstract: Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We test this hypothesis in an experiment on financial options against the benchmark of arbitrage-free pricing. Firstly, we test whether a financial option is priced in analogy with its underlying stock (transference). Secondly, we test for whether variations in the analogy between a financial option and its underlying stock matter (framing). We find evidence in support of both transference and framing.

Keywords: Coarse Thinking; Financial Options; Arbitrage-Free Pricing (search for similar items in EconPapers)
JEL-codes: C91 G12 G14 (search for similar items in EconPapers)
Date: 2009-02-19
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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