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getting advice
Strong positive relationship between advice
and wealth
Bias/wealth relationship negative, large and
highly significant among households that does
not advice
No significant relationship between bias and
wealth for house that use advice
Heterogeneity in bias awareness or other to
mitigating strategies within bias quintiles
Summary
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EGB matters in the market
Measure of payment/ interest bias are
correlated with:
• Portfolio allocation
• Savings
• Wealth
Consistent with direct effect on payment/
interest bias and a correlation between
payment/ interest bias and FV bias
Alternative explanations
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Bias may be correlated with some omitted
variable that explains the result
Financial sophistication
Omitted decision inputs
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Financial sophistication
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Omitted decision inputs
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Summary
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More biased households are less likely to hold
bonds, but magnitude of effect is small
EGB not strongly correlated with financial
sophistication
Control variables:
• Time preference
• Risk aversion
Significantly correlated with outcome
variables
Households with payment/ interest biases
might have unmeasured behavioural biases
payment/ interest biases is strongly correlated
with more borrowing, less saving, short term
instalment debt and short term assets
Many biased households do not delegate or
learn rapidly
Lenders use monthly payment marketing that
misrepresents interest rates
Individuals with EGB might have biases in
other dimensions as well
Thinking about Prices versus
thinking about returns in
financial markets
Introduction
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Focus on framing effect
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Neoclassical Theory:
• Individual decision invariant to changes
in how an information is presented
(framing)
But price and return estimates may be
influenced by framing
Motivation and research
goals
•
Research question
Do investors understand a chart of a fund´s
performance in the same way when the
performance chart plots past prices or past
returns?
And is it the same to ask an analyst to forecast
prices or returns?
Empirical setup
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Results
Financial websites us:
• Price charts present development of a
market index
• Return charts to display development of a
passive fund indexed on it
Randomize experiments on different framings
• Prices vs. Returns
Variation of:
• Amount of information
• Level expertise
• Incentive schemes
Three experimental studies:
• Study 1 baseline, study 2 robustness
• Study 3 real word test with financial
professionals
Study 1&2:
• Task price: provide a forecast of future
price level of financial instrument next
month
• Task return: provide a forecast of future
return of financial instrument next month
Study 3:
• Task price: expectation of DAX point level
in one month
• Task return: expectation of monthly
percentage change of DAX return
Demographics of participants:
• Study 1&2 similar based on almost all
demographic variables
• Professionals in study 3 are significantly
older
• Professionals of study 3 are almost
exclusively male
Main Results:
• Asking participants to forecast returns
result in higher subjective return
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Explaining the effect
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Summary
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expectation
Showing them return charts result in lower
subjective return expectations
Very similar effects between study 1&2
Task effect manifests in forecasts of finance
professionals even though they have
unrestricted access to various information
Effect remains by restricting the sample to
professionals who act as professional
forecasters
Processing Theory, two process of thought:
• System I: effortless and intuitive thinking
• System II: deliberate, reflective and
effortful reasoning
Role of intuition:
• Interaction of treatment dummies with
intuitive thinking
• Results are not driven by better
mathematically skills
• Stronger tendency to reflect and
deliberately reach a solution and to rely
on analytical thinking
Negative numbers:
• Human brain only equipped with innate
intuition for positive numbers
• Task price treatment: articulate negative
numbers without using negative numbers
• Therefore burden to report pessimism is
lower than in task return treatment
Other explanations:
• Results are not driven by anchoring
• Main effects cannot be explained by any
difference in the selection of prominent
chartist strategies
Study compares formats of prices and returns
in context of financial market expectations
based on three laboratory studies
• Study 1 baseline study
• Study 2 robustness study
• Study 3 real world professionals
Asking to forecast returns opposed to prices
results in higher expectations
Showing return charts opposed to price charts
results in lower expectations
Effects of question and chart formats mediated
by involuntary impulses by intuitive thinking
Showing price charts of more recent past
returns tend to ignorance of more distant past
•
Showing return bar charts draws their
attention to entire available history