We investigate how the experience of extreme events, such as the COVID-19 market crash, influence risk-taking behavior. To isolate changes in risk-taking from other factors, we ran controlled ...experiments with finance professionals in December 2019 and March 2020. We observe that their investments in the experiment were 12 percent lower in March 2020 than in December 2019, although their price expectations had not changed, and although they considered the experimental asset less risky during the crash than before. This lower perceived risk is likely due to adaptive normalization, as volatility during the shock is compared to volatility experienced in real markets (which was low in December 2019, but very high in March 2020). Lower investments during the crash can be supported by higher risk aversion, not by changes in beliefs.
Bubbles and Financial Professionals Weitzel, Utz; Huber, Christoph; Huber, Jürgen ...
The Review of financial studies,
06/2020, Letnik:
33, Številka:
6
Journal Article
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The efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial ...professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble drivers–capital inflows or high initial capital supply–are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments.
Risk is an integral part of many economic decisions and is vitally important in finance. Despite extensive research on decision making under risk, little is known about how risks are actually ...perceived by financial professionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 finance professionals and 4,559 laypeople in nine countries representing ~50% of the world’s population and more than 60% of the world’s gross domestic product, we expose participants to return distributions with equal expected return, and we systematically vary the distributions’ next three higher moments. Of these, skewness is the only moment that systematically affects financial professionals’ perception of financial risk. Strikingly, variance does not influence risk perception, even though return volatility is the most common risk measure in finance in both academia and the industry. When testing other, compound risk measures, the probability to experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals’ propensity to invest, skewness and loss probability also have strong predictive power, while volatility and kurtosis have some additional effect. Our results are very similar for laypeople, and they are robust across and within countries with different cultural backgrounds, as well as for different job fields of professionals.
This paper was accepted by Yuval Rottenstreich, decision analysis.
We explore how individual risk perception influences prices and trading behavior in a market setting. Specifically, our study lets experimental participants trade assets characterized by varying ...shapes of return distributions. While common mean-variance models predict identical prices for most of our assets, we find trading prices to differ significantly. Assets that are perceived as being less risky on average (despite having identical volatility) trade at significantly higher prices. Individually, traders who perceive a certain asset to be less risky are also net buyers on average. With regard to different risk measures, our results show that the probability of a loss is the strongest predictor of transaction prices and risk perception. All these results hold also for experienced traders and when traders can trade two assets at the same time.
Worries about unethical behavior are a recurring issue in the finance industry, which has inspired a number of recent studies. We contribute to this ongoing discussion by investigating preferences ...for truthfulness within the finance industry in a controlled experiment with 415 financial professionals (and 270 students as a control group). Participants have to report one of two numbers, of which one is true, the other false, where truth-telling is costly. In three main treatments we vary the situational context of subjects’ decisions (abstract, neutral, finance context) by applying differently framed instructions. We find that contexts matter for financial professionals: they act more honestly in a financial context and a neutral context than in an abstract situation, while for a control group we find no such differences. Further variations on the financial decision situation do not affect financial professionals’ honesty.
Volatility shocks and investment behavior Huber, Christoph; Huber, Jürgen; Kirchler, Michael
Journal of economic behavior & organization,
02/2022, Letnik:
194
Journal Article
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We investigate how volatility shocks affect investors risk-taking, risk perception and forecasts. We run artefactual field experiments with two participant pools (finance professionals and students), ...differing in (i) the direction of the shock (down, up, or a neutral case) and (ii) the presentation format of the time series (prices or returns). Professionals investments are negatively associated with the price change and performance of the stock and their perceived risk increases to a similar extent following shocks of all directions. Students risk perception, in contrast, is more closely related to the frequency of negative returns rather than an increase in volatility.
To explore why bubbles frequently emerge in the experimental asset market model of Smith, Suchanek, and Williams (1988), we vary the fundamental value process (constant or declining) and the ...cash—to—asset value ratio (constant or increasing). We observe high mispricing in treatments with a declining fundamental value, while overvaluation emerges when coupled with an increasing C/A ratio. A questionnaire reveals that the declining fundamental value process confuses subjects, as they expect the fundamental value to stay constant. Running the experiment with a different context ("stocks of a depletable gold mine" instead of "stocks") significantly reduces mispricing and overvaluation as it reduces confusion.
The replicability of some scientific findings has recently been called into question. To contribute data about replicability in economics, we replicated 18 studies published in the American Economic ...Review and the Quarterly Journal of Economics between 2011 and 2014. All of these replications followed predefined analysis plans that were made publicly available beforehand, and they all have a statistical power of at least 90% to detect the original effect size at the 5% significance level. We found a significant effect in the same direction as in the original study for 11 replications (61%); on average, the replicated effect size is 66% of the original. The replicability rate varies between 67% and 78% for four additional replicability indicators, including a prediction market measure of peer beliefs.
In an experiment with 739 subjects, we study whether and how different interventions might have an influence on the degree of moral behavior when subjects make decisions that can generate negative ...externalities on uninvolved parties. Particularly, subjects can either take money for themselves or donate it to UNICEF for measles vaccines. By considering two fairly different institutional regimes—one with individual decision making, one with a double-auction market—we expose the different interventions to a kind of robustness check. We find that the threat of monetary punishment promotes moral behavior in both regimes. Getting subjects more involved with the traded good has no effect, though, in both regimes. Only the removal of anonymity, thus making subjects identifiable, has different effects across regimes, which we explain by different perceptions of responsibility.
This paper was accepted by Uri Gneezy, behavioral economics
.
•Part of UN sustainable development goal 9 is upgrading production capabilities.•Increasing economic complexity is a key driver for sustainable economic growth.•Sequential model selection used for ...robust generalised method of moments estimation.•Chinese FDI evidently shows a positive impact on host countries’ economic complexity.•Global policy makers should deepen their relationships with the belt and road.
Upgrading the production capabilities in all countries is a target of the UN's 2030 Agenda for Sustainable Development Goal 9. Increasing economic complexity, that is, a country's ability to manufacture more sophisticated products and thus moving up the value chain, is a key driver for sustainable economic growth. This paper investigates whether Chinese Belt and Road investments have impacted the economic complexity of host countries — a topic not addressed in the literature to date, using a sequential generalised method of moments model selection approach. The research focuses on the countries whose economic complexities are below that of China. Our empirical results show significant positive effects of Chinese investments on such host countries’ economic complexities. The inflows of Chinese investments have thus supported the upgrading of production capabilities in these countries. This is encouraging, especially for the Global South countries, to intensify their interactions with the Belt and Road initiative.
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