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American Economic Review Vol. 96 No. 4 2006

Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing

Nicholas Barberis1; Ming Huang2; Richard H. Thaler3

1 Yale School of Management, 135 Prospect Street, P.O. Box 208200, New Haven, CT 06520. · 2 Johnson School of Management and SUFE, Sage Hall, Cornell University, Ithaca, NY 14853. · 3 Graduate School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL 60637.

Abstract

We argue that “narrow framing,” whereby an agent who is offered a new gamble evaluates that gamble in isolation, may be a more important feature of decision-making than previously realized. Our starting point is the evidence that people are often averse to a small, independent gamble, even when the gamble is actuarially favorable. We find that a surprisingly wide range of utility functions, including many nonexpected utility specifications, have trouble explaining this evidence, but that this difficulty can be overcome by allowing for narrow framing. Our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle.

DOI
10.1257/aer.96.4.1069
Volume
96
Issue
4
Pages
1069-1090
Language
en
Sources
crossref openalex bibtex:phds-export.bib

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