Hidden skewness: On the difficulty of multiplicative compounding under random shocks

Christian Zankiewicz, Ludwig Ensthaler, Olga Nottmeyer and Georg Weizsäcker

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: Multiplicative growth processes that are subject to random shocks often have an asymmetric distribution of outcomes. In a series of incentivized laboratory experiments we show that a large majority of participants either strongly underestimate the asymmetry or ignore it completely. Participants misperceive the outcome distribution's spread to be too narrow-band and they estimate the median and the mode to lie too close to the distribution's center. The observed bias in expectations is irrespective to risk preferences and it appears under a variety of conditions regarding feedback, incentive size, and market contexts. The bias is largely consistent with a behavioral model in which geometric growth is confused with linear growth. This misperception is a possible explanation of investors' difficulties with real-world financial products like leveraged ETFs and is also related to issues regarding real estate investments, retirement savings plans or investments in college funds.

JEL-codes: C91 D03 D14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/112815/1/VfS_2015_pid_74.pdf (application/pdf)

Related works:
Journal Article: Hidden Skewness: On the Difficulty of Multiplicative Compounding Under Random Shocks (2018)
Working Paper: Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks (2014)
Working Paper: Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112815

Access Statistics for this paper

More papers in VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().