Other SOM behavior research studies
explore consumers’ risk-taking ways
The following are some of the other behavioral research projects at Yale School
of Management (SOM). (See
related story.)
Stocks as lotteries
Economists have proposed many different models of how the stock market works.
Virtually all of them assume that investors are risk-averse.
In “Stocks as Lotteries: The Implications of Probability Weighting for
Security Prices,” Professor Nicholas Barberis of Yale SOM and his co-author
Ming Huang of Cornell University argue that people are often actually risk-seeking.
There are instances — such as buying a lottery ticket — where people
are willing to pay more for a bet than its actuarial value, they note, and
the same may be true for lottery-like stocks. This insight may shed light on
financial phenomena including the low average return on IPOs and the lack of
diversification in many household portfolios.
Simplifying saving
Workers put off making important decisions, such as enrolling in an employer-sponsored
401(k), reducing their long-run wealth accumulation.
Companies can increase employee participation in savings plans by making the
investment process easier, says James J. Choi, assistant professor of finance.
In “Simplification and Saving,” Choi and his Harvard co-authors
studied a low-cost intervention that allows employees to enroll in savings
plans with pre-selected contribution and asset allocation rates by checking
a box on a card. Employee participation rates increased 10 to 20 percentage
points in the companies studied.
Bubble investors: Exuberant, but not irrational
The boom in U.S. stock prices in the late 1990s is widely considered one of
the biggest bubbles in financial history.
Professors William N. Goetzmann and Ravi Dhar surveyed investors who were active
during this period and found that their purchases were motivated by a strong
belief in their ability to identify under- and overvalued stocks through fundamental
research.
Among the other findings the professors report in “Bubble Investors:
What Were They Thinking?” is that more than half of investors surveyed
admitted buying stocks that they believed to be overvalued with the anticipation
that share prices would go higher.
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