Options traders exhibit subadditive decision weights |
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Authors: | Craig R Fox Brett A Rogers Amos Tversky |
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Institution: | 1. Fuqua School of Business, Duke University, Box 90120, 27708-0120, Durham, NC 2. Department of Psychology, Stanford University, Jordan Hall, Building 420, 94305-2130, Stanford, CA 3. Department of Psychology, Stanford University, Jordan Hall, Building 420, 94305-2130, Stanford, CA
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Abstract: | Professional options traders priced risky prospects as well as uncertain prospects whose outcomes depended on future values of various stocks. The prices of the risky prospects coincided with their expected value, but the prices of the uncertain prospects violated expected utility theory. An event had greater impact on prices when it turned an impossibility into a possibility or a possibility into a certainty than when it merely made a possibility more or less likely, as predicted by prospect theory. This phenomenon is attributed to the subadditivity of judged probabilities. |
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