Gerlinde Fellner

Risk Attitude and Market Behavior: Evidence from Experimental Asset Markets

In this paper we relate individual risk attitude as elicited by binary lottery choices to market behavior. By analyzing 26 independent experimental markets with a total of 280 participants, we show that binary lottery choices are systematically correlated with market behavior: the higher the degree of risk aversion the lower the observed market activity. Our results also uncover gender differences in risk attitude, which moderate market behavior. We find that women are more risk averse than men, submit fewer offers, and engage less often in trades.

Causes, consequences, and cures of myopic loss aversion: an experimental investigation

We examine in an experiment the causes, consequences and possible cures of myopic loss aversion (MLA) for investment behaviour under risk. We find that both, investment horizons and feedback frequency contribute almost equally to the effects of MLA. Longer investment horizons and less frequent feedback lead to higher investments. However, when given the choice, subjects prefer on average shorter investment horizons and more frequent feedback. Exploiting the status quo bias by setting a long investment horizon or low feedback frequency as a default turns out to be a successful behavioural intervention that increases investment levels.

Partner selection in public goods experiments

The effect of introducing costly partner selection for the voluntary contribution to a public good is examined. Participants are in six sequences of five rounds of a two-person public good game in partner design. At the end of each sequence, they can select a new partner out of six group members. Unidirectional and bidirectional partner selection mechanisms are introduced and compared to controls with random partner rematching. Results demonstrate significantly higher cooperation in correspondence to unidirectional partner selection than to bidirectional selection and random rematching. Average monetary effort for being able to choose a partner is substantially high and remains stable.

What limits escalation?—Varying threat power in an ultimatum experiment

Abstract Threat power is the ability to impose a great loss on someone else at relatively low own cost and can be measured by the ratio of other’s and own loss. It can be varied by assuming that rejecting an ultimatum reduces the payoff of the proposer to its λ-share and that of the responder to its (1−λ)-share where 0≤λ≤1. Results demonstrate that proposers become more greedy when λ is high, whereas responders adjust to threat power, but punish greed to a high extent irrespective of own rejection cost.

Illusion of Control as a Source of Poor Diversification: Experimental Evidence

This paper investigates factors that influence individual portfolio allocations, with particular focus on illusion of control. Participants in the experiment form their portfolios of two risky lotteries and one risk-free alternative with the target to reach a predetermined income. Subjects show illusion of control as they excessively invest in a lottery when they are in charge of the chance move. This finding is amplified when self-selection is possible and mitigated when a well-diversified default portfolio is offered. Presenting sequences of chance moves prior to investment does not affect diversification. In line with excessive extrapolation, the higher the number of observed positive prior outcomes, the more likely is a positive prediction and in turn a higher investment.

Short sale constraints, divergence of opinion and asset values: Evidence from the laboratory

The overvaluation hypothesis (Miller 1977) predicts that a) stocks are overvalued when there are short selling restrictions and that b) the overvaluation is increasing in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. Our results support the hypothesis that prices are higher in the presence of short selling constraints. The overvaluation does not depend on the degree of divergence of opinion.

The Equity Home Bias: Contrasting an Institutional with a Behavioral Explanation

An empirically well-established finding is that equity portfolios are concentrated in the domestic equity market of the investor. Previous theoretical and empirical analyses have mainly focused on institutional explanations and largely neglected individual behavior. In this study we report the results of an experiment in which we contrast institutional with behavioral explanations by comparing asymmetric information to social identity. Our results show that social forces, triggered by group affiliation, drive underdiversified and domestically biased portfolio allocations. Moreover, social identity explains the observed behavior equally well as asymmetric information. We also find that individuals are spuriously more optimistic toward the performance of domestic firms.

Why Don't they Minimize their Tax? An Experimental Approach to Cross Border Hybrid Finance

International tax law allows, under certain circumstances, to considerably reduce the group average tax rate. In some cases, even the tax-free repatriation of yields on intragroup finance is possible, in particular when using hybrid finance. These cases are normally connected to complex questions of foreign, domestic, and bilateral tax law as well as to uncertainty on whether the intended tax consequences will be upheld by the fiscs in future years. We experimentally investigate the two key variables, legal uncertainty and tax complexity while controlling for decision makers’ risk attitude. Results show that overall tax complexity has a negative effect on the probability to choose a hybrid finance instrument, while legal uncertainty has not. The impact of the two factors is moderated by decision makers’ risk attitudes.