Kauppakorkeakoulun julkaisuportaali
Aalto-yliopiston kauppakorkeakoulun gradujen tiedot nyt Aaltodocissa: Aaltodoc-julkaisuarkisto
Kauppakorkeakoulu | Laskentatoimen ja rahoituksen laitos | Rahoitus | 2009
Tutkielman numero: 12205
Manipulating individuals' risk-taking with financial incentives: a myopic loss aversion experiment
Tekijä: Abramov, Vladimir
Otsikko: Manipulating individuals' risk-taking with financial incentives: a myopic loss aversion experiment
Vuosi: 2009  Kieli: eng
Laitos: Laskentatoimen ja rahoituksen laitos
Aine: Rahoitus
Asiasanat: rahoitus; financing; behavioral finance; behavioral finance
Sivumäärä: 110
» hse_ethesis_12205.pdf pdf  koko: 4 MB (3589099)
Avainsanat: Myopic loss aversion; Prospect theory; Mental accounting; Disposition effect; Overconfidence
This study relates to behavioural biases and their influence on individuals’ decision making in financial markets. I introduce a new experimental setting which allows testing for myopic loss aversion (MLA) without protecting individuals from their own myopia. Utilizing this experimental design I try to find out whether financial incentives in the form of fees or bonuses can be used to decrease individuals’ portfolio reviewing frequency and increase their risk-taking. From the point of view of practical implication my study is aimed on finding out how different financial incentives (positive/negative) can be used to change investors framing and portion invested in stocks.

I also contribute to the existing literature by including tests for overconfidence, gender and occupation differences and their relationship to myopic loss aversion. In addition, I include tests for reactions to gains and losses and present a new hypothetical theory of double mental account, which is aimed to better explain differences in outcome reactions of individuals with different amount of total wealth invested in risky assets in relation to the prospect theory.

DATA To collect data I constructed an internet based application which involves question sets and an asset allocation game in the form of coin flipping series. Subject group consists of HSE students and market professional. I used real monetary rewards to increase response rate and robustness/comparability of my results.

RESEARCH RESULTS I find that positive financial incentives in the form of bonuses can be effective in reducing evaluation frequency without decreasing individuals’ risk-taking. Manipulations with negative financial incentives were successful in reducing evaluation frequency but failed to maintain risk-taking with low evaluation frequency. I also find that MLA effect does not hold when financial incentive manipulations are applied.

My results show that women placed significantly lower bets than men and had higher evaluation frequency. However, difference in evaluation frequencies of men and women are not statistically significant. I find strong positive relationship between individuals estimating better than average performance and bet size indicating that risk-taking of overconfident individuals is significantly higher.

I find partial appliance with the double mental account theory as individuals with lower than median bets increased their bet after losses to lower extent than individuals with above median bets and the difference is statistically significant.
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