The Cost of Paying Attention: Cognitive Resource Scarcity and Investor Activity Around FDA Announ... more The Cost of Paying Attention: Cognitive Resource Scarcity and Investor Activity Around FDA Announcements "…in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes." Herbert Simon (1971)
Stock price reactions to company-specific events are supposed to reflect the effect of the events... more Stock price reactions to company-specific events are supposed to reflect the effect of the events on the companies’ expected future financial performance. Yet, it is difficult to estimate the effect an event may exert on a given company and, along with rational considerations, investors’ reactions to company-specific events may also be affected by various psychological factors. In this chapter, we sketch the picture emerging from three studies of ours dealing with psychol gical aspects of investors’ reactions to analyst recommendation revisions. These studies demonstrate that stock price reactions to recommendation revisions may depend on a number of factors, such as: (i) contemporaneous stock market index returns; (ii) contemporaneous changes in the value of VIX index; and (iii) daylight duration.We attribute the findings to the effects of the availability heuristic and mood on investors’ behavior.
Journal of behavioral and experimental economics, Feb 1, 2019
Research in psychology has established that activation of religious ideas affects individuals' be... more Research in psychology has established that activation of religious ideas affects individuals' behavior. We hypothesize that religious and honesty mechanisms activated on the High Holidays, the ten days before Yom Kippur, when people seek repentance, amplify people's anxiety and affect their financial decision-making. We find that returns during the High Holidays are abnormally low; implied volatility, measured by VIX and VXO, as well as realized volatility estimates, are abnormally high; and the abnormal increase in implied volatility overshoots future volatility. Using these results, we devise a simple trading rule that investors may consider to maximize returns during the High-Holidays period. Hilary and Hui (2009) report that firms in countries with higher religiosity levels display lower degrees of risk exposure, measured by variances in equity and asset returns. Moreover, they find that CEOs switching employers are more likely to join a firm with a religious environment, which is similar to the environment in their former firm. Hong and Kacperczyk (2009) suggest that social norms have an effect on financial markets by documenting that "sin" stocks, i.e., the stocks of alcohol, tobacco and gambling firms, have fewer analysts following them, lower institutional ownership, and higher expected returns, and are relatively inexpensive as reflected in their low price-to-book or price-to-earnings ratios. Kumar, Page, and Spalt (2011) document that in states with higher ratios of Catholics to Protestants (the former's attitude toward lotteries is considered more permissive), the legalization and early adoption of state lotteries are more likely, per-capita lottery sales are higher, and individual investors assign larger portfolio weights to lottery-type stocks. Moreover, Shu, Sulaeman, and Yeung (2012) examine the effects of county-level Protestant or Catholic ratios on return volatilities of mutual funds, establishing that Catholics exhibit less aversion to speculative risk than Protestants. Jiang, Jiang, Kim, and Zhang (2015) report that family firms with religious founders
We price a no claims discount (NCD) system, in which the insured receives a discount (d) in the a... more We price a no claims discount (NCD) system, in which the insured receives a discount (d) in the absence of claims for k years. The paper gives optimal decisions for both the insured and the insurer, using Markov decision processes and game theory. The company fixes a premium (π) and a discount (d), accounting for the reaction of the insured.
Journal of Economic Behavior and Organization, Jun 1, 2008
Decision makers often fail to forecast their future feeling, erroneously projecting current prefe... more Decision makers often fail to forecast their future feeling, erroneously projecting current preferences onto future preferences, an attribute recently labeled “projection bias” [Loewenstein, G., O’Donoghue, T., Rabin, M., 2003. Projection bias in predicting future utility. Quarterly Journal of Economics 118, 1209–1248]. There is sweeping psychological evidence for the existence of projection bias. Still, a scrutiny of projection bias based on
Research has established that economic decisions often deviate from game theoretic predictions. W... more Research has established that economic decisions often deviate from game theoretic predictions. We explore the process of causal thinking as a possible explanation for such deviations. Specifically, we suggest that causal information affects economic decisions based on the principles advocated by Weiner's (1985, 1986) attribution theory (AT) of motivation and emotion. Prior research in this area considered only subsets of the dimensions employed by the theory. We test the predictions stemming from AT in contexts where economic decisions involve sharing gains between party members (e.g., splitting profits) and assess how such decisions are affected by the reasons attributed for obtaining the gains. Results indicate a significant link between causal attribution and economic decisions and shed light on the rules and the rationale that guide this link. We conclude that research into economic decision making should pay a greater attention to the explanatory value of AT.
The psychological literature indicates that people's mood affects their choices and judgments... more The psychological literature indicates that people's mood affects their choices and judgments. We find that short trading days around holidays on the Tel Aviv Stock Exchange are accompanied by positive abnormal returns and reduced volatility in returns. This anomaly is evident in the main stock indices, as well as most of the economic sector indices. The anomaly seems to be size related, with small and mid-cap indices producing abnormal returns. In addition, the volatility index (VIX) during short trading days tends to be lower than on normal trading days. Our findings suggest that investors can benefit from using two simple trading strategies.
Using asset market data, as well as theoretical relations between investors' preferences, option-... more Using asset market data, as well as theoretical relations between investors' preferences, option-implied, risk-neutral, probability distribution functions (PDFs,) and index-implied, actual, PDFs, this paper extracts a time-series of investors' relative risk aversion (RRA) functions. Based on results recently derived by Benninga and Mayshar (2000), these functions are used to recover the evolution of risk preferences heterogeneity. Applying non-parametric estimation on European call options written on the S&P500 index, we find that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferences heterogeneity series is positively correlated in a static, as well as a dynamic, setup with a prevalent proxy for investors heterogeneity, namely, the spread between auction-and market-yields of Treasury bills.
Journal of Economic Behavior and Organization, Aug 1, 2009
Examining myopic loss aversion (MLA [Benartzi, S., Thaler, R., 1995. Myopic loss aversion and the... more Examining myopic loss aversion (MLA [Benartzi, S., Thaler, R., 1995. Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics 110, 73–92]) in real financial markets has several merits: in repeated situations investors may learn from each other, aggregate market prices may eliminate individual violations of expected utility, and individuals may decide differently in real situations than in
Numerous psychological studies show that weather conditions affect people's mood and that mood st... more Numerous psychological studies show that weather conditions affect people's mood and that mood states are correlated with people's subjective evaluation of future probabilities. In this paper, a new approach is developed and asset market data are employed to test the mood-subjective probability relation. Cloud cover and precipitation volume serve as two mood proxies. Our statistical analysis suggests that bad mood states are characterized by investors placing higher probabilities on adverse events.
This paper presents a new approach for pricing insurance contracts, based both on economic and pr... more This paper presents a new approach for pricing insurance contracts, based both on economic and probabilistic arguments. The novel property of this approach is that it uses the demand for insurance to find the optimal premium an insurer should charge. Our approach stands in contrast to the standard loading factor methods used in actuarial science, where the number of insureds is constant regardless of the charged premium. The insurer maximizes its expected profit, defined as the difference between the expected net revenue from selling insurance contracts and the expected loss due to insolvency. We show how to find the expected-profit maximizing premium, Jr*, and its corresponding optimal number of insureds, n*. The first proposition presented in our paper identifies the premium (and number of insureds that minimize the expected loss due to insolvency). The second proposition gives, for a broad class of demand curves, sufficient conditions for the existence and uniqueness of an internal optimal solution. The third proposition asserts that, due to the suggested expected loss function, the insurer's objective function demonstrates economies to scale. Lastly, we provide a numerical solution for the case of a linear demand curve, giving the optimal premium and number of insureds.
We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between r... more We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between risk and return at the organization level. Our modeling approach addresses shortcomings in previous research approaches. We suggest an alternative approach for inferring the reference point, a key element of PT, and measuring risk, as well as a different representation of the risk-return association taking into
Journal of Economic Behavior and Organization, Nov 1, 2014
ABSTRACT This study provides experimental evidence, using a large sample of 2,894 individuals rec... more ABSTRACT This study provides experimental evidence, using a large sample of 2,894 individuals recruited via business media websites, about the impact of demographic attributes within entrepreneurial teams on funding decisions by external capital providers. In previous work the role of diversity with regard to personal characteristics within entrepreneurial teams, such as education, gender and nationality was not clear. Specifically, we focus on task-oriented (e.g., education, experience) and relations-oriented (e.g., age, nationality) dimensions of diversity. The participants of our experiment had to decide on providing early-stage funding to a team of start-up managers whereas the diversity of these teams varied across treatment groups. We find that task-oriented diversity is positively and significantly related to the willingness of respondents to provide capital. Interestingly, the same applies for relations-oriented diversity. This suggests social capital of an entrepreneurial team matters to a greater extent to funding decisions of external investors than the behavioral integration of the team's human capital. Entrepreneurial teams must therefore carefully balance the social costs of non-task-related diversity and the access to financial resources.
The North American Journal of Economics and Finance, 2019
The interplay between stock returns and idiosyncratic volatility (IVOL) has been subject to exten... more The interplay between stock returns and idiosyncratic volatility (IVOL) has been subject to extensive empirical investigation, yielding mixed findings. Earlier empirical investigation found either a positive relationship between expected returns and idiosyncratic volatility or none at all, the latter consistent with classical asset pricing theory. Further recent empirical research suggested a negative relationship between the variables. In this study, we use data about US firms from 1990 to 2016 and show that the aggregate market volatility risk, captured by the VIX, plays a role in the relationship between IVOL and stock returns. Specifically, an increase (decline) in the VIX tends to be followed by a negative (positive) relationship between idiosyncratic volatility and future returns, even after taking into account other risk factors. We maintain that an increase in the VIX, also called the investors' fear gauge, may reflect an increase in investors' risk aversion, prompting them to balance their portfolios by increasing the diversity of their investments.
Abstract Colors are widely present in the financial decision making arena: at firms’ and data pro... more Abstract Colors are widely present in the financial decision making arena: at firms’ and data providers’ websites; television reports; newspaper publications; advertizements; security market displays, with colors such as red and green prominently employed. Our experimental analysis involves a between subject design exposing subjects to financial substance on colored backgrounds and exploring the effect on their investment decisions. We focus on financial decisions under uncertainty about probability, examining subjects’ investment valuations and the probabilities they assign to the possible outcomes. This study explores the role of color exposure as a priming factor in financial decision making. Priming is a process of activating particular connections or associations in memory prior to carrying out an action or task. The associations occur when a certain stimulus or event increases the availability of specific information categories and, as a result, affect decision making. The results indicate that red color priming emphasizes value losses of the underlying asset. To wit, subjects who were exposed to red (R) assigned higher valuations and probabilities to events involving the loss domain, than to events involving the gain domain, relatively to the valuations assigned by subjects who were exposed to green (G). The aggregated evaluation given by the R subjects when the investment payback was subject to negative (positive) underlying asset returns was higher (lower) than that of the G subjects by roughly 15% (19%) of the invested amount.
This paper integrates considerations of mood into non-expected utility theories and extends the e... more This paper integrates considerations of mood into non-expected utility theories and extends the existing literature on how mood influences peoples' decisions and choices. An important element in many non-expected utility theories is the probability weighting function (PWF), that nonlinearly weights physical probabilities. Using US market price data, we attempt to establish an empirical relation between investors' mood and these PWFs. To proxy investors' mood, we rely on an established medical phenomenon, seasonal affective disorder, a source of depression caused by the scarcity of daylight time during fall and winter, as well as on a measure of cloudiness. We find statistical evidence indicating that bad mood causes investors to systematically distort their PWFs.
The presented research tests Cumulative Prospect Theory (CPT, Kahneman and Tversky (1979), Tversk... more The presented research tests Cumulative Prospect Theory (CPT, Kahneman and Tversky (1979), Tversky and Kahneman (1992)) in the financial market, using U.S. stock option data. Option prices possess information about actual investors' preferences in such a way that an exploitation of conventional option analysis, along with theoretical relationships, makes it possible to elicit investor preferences. The option data in this study serve for estimating the two essential elements of the CPT, namely, the Value Function and the Probability Weighting Function. The main part of the work focuses on the functions' simultaneous estimation under CPT original parametric specification. The shape of the estimated functions is found to be in line with theory. Comparing to results of laboratory experiments, the estimated functions are closer to linearity and loss aversion is less pronounced.
Journal of Economic Behavior and Organization, Dec 1, 2003
Psychological research links good (bad) mood with increased (decreased) risk aversion. This relat... more Psychological research links good (bad) mood with increased (decreased) risk aversion. This relation has been widely documented in experimental setups. There has not been, however, a complementary analysis with real-life decisions data. This paper fills this gap by testing the relation between mood and risk attitude in capital markets. To shed light on that relation, we recover risk preferences from capital market data and employ accumulated evidence suggesting that people's mood is correlated with weather conditions. Corroborating established experimental evidence, we find that good (bad) mood is associated with investors being less (more) willing to tolerate risk.
The link between environmental attitudes and dietary choice is gaining increasing interest in the... more The link between environmental attitudes and dietary choice is gaining increasing interest in the scientific world. The current research aims to specify the relationships between dietary choice and preferences for near-food products: environmentally friendly/environmentally unfriendly. The study was conducted in Israel, including four dietary choice subgroups: 1) meat, 2) fish, 3) eggs, and 4) dairy products. The extended pre-test questionnaire included 120 usable questionnaires. Results from the final questionnaires (N ¼ 828), support our hypothesis, indicating a positive relationship between consumer eating preferences and their preferences in choosing environmentally friendly products over the environmentally unfriendly products. Our results regarding consumer preferences of near-food products reveal that vegan consumers, and a higher score in the Environmental Concern scale, increase the odds of choosing the environmentally friendly product significantly for the three tested products (deodorant, washing-powder, and hand-soap). Therefore, our results concerning vegans are robust for the three tested products and are complementary to the literature reviewed. Finally, the results of the research may contribute to create an incentive for companies to improve sustainability of their products, while for environmental agencies, policy makers and educators to encourage the public towards more plant-based dietary choices, both decreasing the ecological footprint.
The Cost of Paying Attention: Cognitive Resource Scarcity and Investor Activity Around FDA Announ... more The Cost of Paying Attention: Cognitive Resource Scarcity and Investor Activity Around FDA Announcements "…in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes." Herbert Simon (1971)
Stock price reactions to company-specific events are supposed to reflect the effect of the events... more Stock price reactions to company-specific events are supposed to reflect the effect of the events on the companies’ expected future financial performance. Yet, it is difficult to estimate the effect an event may exert on a given company and, along with rational considerations, investors’ reactions to company-specific events may also be affected by various psychological factors. In this chapter, we sketch the picture emerging from three studies of ours dealing with psychol gical aspects of investors’ reactions to analyst recommendation revisions. These studies demonstrate that stock price reactions to recommendation revisions may depend on a number of factors, such as: (i) contemporaneous stock market index returns; (ii) contemporaneous changes in the value of VIX index; and (iii) daylight duration.We attribute the findings to the effects of the availability heuristic and mood on investors’ behavior.
Journal of behavioral and experimental economics, Feb 1, 2019
Research in psychology has established that activation of religious ideas affects individuals' be... more Research in psychology has established that activation of religious ideas affects individuals' behavior. We hypothesize that religious and honesty mechanisms activated on the High Holidays, the ten days before Yom Kippur, when people seek repentance, amplify people's anxiety and affect their financial decision-making. We find that returns during the High Holidays are abnormally low; implied volatility, measured by VIX and VXO, as well as realized volatility estimates, are abnormally high; and the abnormal increase in implied volatility overshoots future volatility. Using these results, we devise a simple trading rule that investors may consider to maximize returns during the High-Holidays period. Hilary and Hui (2009) report that firms in countries with higher religiosity levels display lower degrees of risk exposure, measured by variances in equity and asset returns. Moreover, they find that CEOs switching employers are more likely to join a firm with a religious environment, which is similar to the environment in their former firm. Hong and Kacperczyk (2009) suggest that social norms have an effect on financial markets by documenting that "sin" stocks, i.e., the stocks of alcohol, tobacco and gambling firms, have fewer analysts following them, lower institutional ownership, and higher expected returns, and are relatively inexpensive as reflected in their low price-to-book or price-to-earnings ratios. Kumar, Page, and Spalt (2011) document that in states with higher ratios of Catholics to Protestants (the former's attitude toward lotteries is considered more permissive), the legalization and early adoption of state lotteries are more likely, per-capita lottery sales are higher, and individual investors assign larger portfolio weights to lottery-type stocks. Moreover, Shu, Sulaeman, and Yeung (2012) examine the effects of county-level Protestant or Catholic ratios on return volatilities of mutual funds, establishing that Catholics exhibit less aversion to speculative risk than Protestants. Jiang, Jiang, Kim, and Zhang (2015) report that family firms with religious founders
We price a no claims discount (NCD) system, in which the insured receives a discount (d) in the a... more We price a no claims discount (NCD) system, in which the insured receives a discount (d) in the absence of claims for k years. The paper gives optimal decisions for both the insured and the insurer, using Markov decision processes and game theory. The company fixes a premium (π) and a discount (d), accounting for the reaction of the insured.
Journal of Economic Behavior and Organization, Jun 1, 2008
Decision makers often fail to forecast their future feeling, erroneously projecting current prefe... more Decision makers often fail to forecast their future feeling, erroneously projecting current preferences onto future preferences, an attribute recently labeled “projection bias” [Loewenstein, G., O’Donoghue, T., Rabin, M., 2003. Projection bias in predicting future utility. Quarterly Journal of Economics 118, 1209–1248]. There is sweeping psychological evidence for the existence of projection bias. Still, a scrutiny of projection bias based on
Research has established that economic decisions often deviate from game theoretic predictions. W... more Research has established that economic decisions often deviate from game theoretic predictions. We explore the process of causal thinking as a possible explanation for such deviations. Specifically, we suggest that causal information affects economic decisions based on the principles advocated by Weiner's (1985, 1986) attribution theory (AT) of motivation and emotion. Prior research in this area considered only subsets of the dimensions employed by the theory. We test the predictions stemming from AT in contexts where economic decisions involve sharing gains between party members (e.g., splitting profits) and assess how such decisions are affected by the reasons attributed for obtaining the gains. Results indicate a significant link between causal attribution and economic decisions and shed light on the rules and the rationale that guide this link. We conclude that research into economic decision making should pay a greater attention to the explanatory value of AT.
The psychological literature indicates that people's mood affects their choices and judgments... more The psychological literature indicates that people's mood affects their choices and judgments. We find that short trading days around holidays on the Tel Aviv Stock Exchange are accompanied by positive abnormal returns and reduced volatility in returns. This anomaly is evident in the main stock indices, as well as most of the economic sector indices. The anomaly seems to be size related, with small and mid-cap indices producing abnormal returns. In addition, the volatility index (VIX) during short trading days tends to be lower than on normal trading days. Our findings suggest that investors can benefit from using two simple trading strategies.
Using asset market data, as well as theoretical relations between investors' preferences, option-... more Using asset market data, as well as theoretical relations between investors' preferences, option-implied, risk-neutral, probability distribution functions (PDFs,) and index-implied, actual, PDFs, this paper extracts a time-series of investors' relative risk aversion (RRA) functions. Based on results recently derived by Benninga and Mayshar (2000), these functions are used to recover the evolution of risk preferences heterogeneity. Applying non-parametric estimation on European call options written on the S&P500 index, we find that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferences heterogeneity series is positively correlated in a static, as well as a dynamic, setup with a prevalent proxy for investors heterogeneity, namely, the spread between auction-and market-yields of Treasury bills.
Journal of Economic Behavior and Organization, Aug 1, 2009
Examining myopic loss aversion (MLA [Benartzi, S., Thaler, R., 1995. Myopic loss aversion and the... more Examining myopic loss aversion (MLA [Benartzi, S., Thaler, R., 1995. Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics 110, 73–92]) in real financial markets has several merits: in repeated situations investors may learn from each other, aggregate market prices may eliminate individual violations of expected utility, and individuals may decide differently in real situations than in
Numerous psychological studies show that weather conditions affect people's mood and that mood st... more Numerous psychological studies show that weather conditions affect people's mood and that mood states are correlated with people's subjective evaluation of future probabilities. In this paper, a new approach is developed and asset market data are employed to test the mood-subjective probability relation. Cloud cover and precipitation volume serve as two mood proxies. Our statistical analysis suggests that bad mood states are characterized by investors placing higher probabilities on adverse events.
This paper presents a new approach for pricing insurance contracts, based both on economic and pr... more This paper presents a new approach for pricing insurance contracts, based both on economic and probabilistic arguments. The novel property of this approach is that it uses the demand for insurance to find the optimal premium an insurer should charge. Our approach stands in contrast to the standard loading factor methods used in actuarial science, where the number of insureds is constant regardless of the charged premium. The insurer maximizes its expected profit, defined as the difference between the expected net revenue from selling insurance contracts and the expected loss due to insolvency. We show how to find the expected-profit maximizing premium, Jr*, and its corresponding optimal number of insureds, n*. The first proposition presented in our paper identifies the premium (and number of insureds that minimize the expected loss due to insolvency). The second proposition gives, for a broad class of demand curves, sufficient conditions for the existence and uniqueness of an internal optimal solution. The third proposition asserts that, due to the suggested expected loss function, the insurer's objective function demonstrates economies to scale. Lastly, we provide a numerical solution for the case of a linear demand curve, giving the optimal premium and number of insureds.
We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between r... more We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between risk and return at the organization level. Our modeling approach addresses shortcomings in previous research approaches. We suggest an alternative approach for inferring the reference point, a key element of PT, and measuring risk, as well as a different representation of the risk-return association taking into
Journal of Economic Behavior and Organization, Nov 1, 2014
ABSTRACT This study provides experimental evidence, using a large sample of 2,894 individuals rec... more ABSTRACT This study provides experimental evidence, using a large sample of 2,894 individuals recruited via business media websites, about the impact of demographic attributes within entrepreneurial teams on funding decisions by external capital providers. In previous work the role of diversity with regard to personal characteristics within entrepreneurial teams, such as education, gender and nationality was not clear. Specifically, we focus on task-oriented (e.g., education, experience) and relations-oriented (e.g., age, nationality) dimensions of diversity. The participants of our experiment had to decide on providing early-stage funding to a team of start-up managers whereas the diversity of these teams varied across treatment groups. We find that task-oriented diversity is positively and significantly related to the willingness of respondents to provide capital. Interestingly, the same applies for relations-oriented diversity. This suggests social capital of an entrepreneurial team matters to a greater extent to funding decisions of external investors than the behavioral integration of the team's human capital. Entrepreneurial teams must therefore carefully balance the social costs of non-task-related diversity and the access to financial resources.
The North American Journal of Economics and Finance, 2019
The interplay between stock returns and idiosyncratic volatility (IVOL) has been subject to exten... more The interplay between stock returns and idiosyncratic volatility (IVOL) has been subject to extensive empirical investigation, yielding mixed findings. Earlier empirical investigation found either a positive relationship between expected returns and idiosyncratic volatility or none at all, the latter consistent with classical asset pricing theory. Further recent empirical research suggested a negative relationship between the variables. In this study, we use data about US firms from 1990 to 2016 and show that the aggregate market volatility risk, captured by the VIX, plays a role in the relationship between IVOL and stock returns. Specifically, an increase (decline) in the VIX tends to be followed by a negative (positive) relationship between idiosyncratic volatility and future returns, even after taking into account other risk factors. We maintain that an increase in the VIX, also called the investors' fear gauge, may reflect an increase in investors' risk aversion, prompting them to balance their portfolios by increasing the diversity of their investments.
Abstract Colors are widely present in the financial decision making arena: at firms’ and data pro... more Abstract Colors are widely present in the financial decision making arena: at firms’ and data providers’ websites; television reports; newspaper publications; advertizements; security market displays, with colors such as red and green prominently employed. Our experimental analysis involves a between subject design exposing subjects to financial substance on colored backgrounds and exploring the effect on their investment decisions. We focus on financial decisions under uncertainty about probability, examining subjects’ investment valuations and the probabilities they assign to the possible outcomes. This study explores the role of color exposure as a priming factor in financial decision making. Priming is a process of activating particular connections or associations in memory prior to carrying out an action or task. The associations occur when a certain stimulus or event increases the availability of specific information categories and, as a result, affect decision making. The results indicate that red color priming emphasizes value losses of the underlying asset. To wit, subjects who were exposed to red (R) assigned higher valuations and probabilities to events involving the loss domain, than to events involving the gain domain, relatively to the valuations assigned by subjects who were exposed to green (G). The aggregated evaluation given by the R subjects when the investment payback was subject to negative (positive) underlying asset returns was higher (lower) than that of the G subjects by roughly 15% (19%) of the invested amount.
This paper integrates considerations of mood into non-expected utility theories and extends the e... more This paper integrates considerations of mood into non-expected utility theories and extends the existing literature on how mood influences peoples' decisions and choices. An important element in many non-expected utility theories is the probability weighting function (PWF), that nonlinearly weights physical probabilities. Using US market price data, we attempt to establish an empirical relation between investors' mood and these PWFs. To proxy investors' mood, we rely on an established medical phenomenon, seasonal affective disorder, a source of depression caused by the scarcity of daylight time during fall and winter, as well as on a measure of cloudiness. We find statistical evidence indicating that bad mood causes investors to systematically distort their PWFs.
The presented research tests Cumulative Prospect Theory (CPT, Kahneman and Tversky (1979), Tversk... more The presented research tests Cumulative Prospect Theory (CPT, Kahneman and Tversky (1979), Tversky and Kahneman (1992)) in the financial market, using U.S. stock option data. Option prices possess information about actual investors' preferences in such a way that an exploitation of conventional option analysis, along with theoretical relationships, makes it possible to elicit investor preferences. The option data in this study serve for estimating the two essential elements of the CPT, namely, the Value Function and the Probability Weighting Function. The main part of the work focuses on the functions' simultaneous estimation under CPT original parametric specification. The shape of the estimated functions is found to be in line with theory. Comparing to results of laboratory experiments, the estimated functions are closer to linearity and loss aversion is less pronounced.
Journal of Economic Behavior and Organization, Dec 1, 2003
Psychological research links good (bad) mood with increased (decreased) risk aversion. This relat... more Psychological research links good (bad) mood with increased (decreased) risk aversion. This relation has been widely documented in experimental setups. There has not been, however, a complementary analysis with real-life decisions data. This paper fills this gap by testing the relation between mood and risk attitude in capital markets. To shed light on that relation, we recover risk preferences from capital market data and employ accumulated evidence suggesting that people's mood is correlated with weather conditions. Corroborating established experimental evidence, we find that good (bad) mood is associated with investors being less (more) willing to tolerate risk.
The link between environmental attitudes and dietary choice is gaining increasing interest in the... more The link between environmental attitudes and dietary choice is gaining increasing interest in the scientific world. The current research aims to specify the relationships between dietary choice and preferences for near-food products: environmentally friendly/environmentally unfriendly. The study was conducted in Israel, including four dietary choice subgroups: 1) meat, 2) fish, 3) eggs, and 4) dairy products. The extended pre-test questionnaire included 120 usable questionnaires. Results from the final questionnaires (N ¼ 828), support our hypothesis, indicating a positive relationship between consumer eating preferences and their preferences in choosing environmentally friendly products over the environmentally unfriendly products. Our results regarding consumer preferences of near-food products reveal that vegan consumers, and a higher score in the Environmental Concern scale, increase the odds of choosing the environmentally friendly product significantly for the three tested products (deodorant, washing-powder, and hand-soap). Therefore, our results concerning vegans are robust for the three tested products and are complementary to the literature reviewed. Finally, the results of the research may contribute to create an incentive for companies to improve sustainability of their products, while for environmental agencies, policy makers and educators to encourage the public towards more plant-based dietary choices, both decreasing the ecological footprint.
Uploads
Papers by Doron Kliger