The Influence of Expectations, Risk Attitudes, and Behavioral Biases on Investment Decisions

2009-01-01thesisMADOC (University of Mannheim)2 citationsgreen

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Decision-Making and Behavioral Economics Financial Markets and Investment Strategies Financial Literacy, Pension, Retirement Analysis

Abstract

In order to contribute to a better understanding of individual and aggregate decision making under risk and in order to analyze the influence of risk attitudes, expectations, and biases on decision making under risk, this thesis addresses the following research questions:\n\n1. What are the main determinants of risky choice? Should financial institutions use lottery questions to elicit risk attitudes in a financial context? (Chapter 2)\n\n2. Are risk attitudes and expectations stable over time? What drives changes in risk taking behavior? (Chapter 3)\n\n3. Is overconfidence related to overreaction to new information? Do overreacting subjects invest in less efficient portfolios? (Chapter 4)\n\n4. Is overreaction to new information present in a market setting where subjects receive feedback and can learn over time? (Chapter 5)\n

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References

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1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]

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