American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing
American Economic Review
vol. 96,
no. 4, September 2006
(pp. 1069–1090)
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 decisionmaking 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. (JEL D81, G11)Citation
Barberis, Nicholas, Ming Huang, and Richard H. Thaler. 2006. "Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing." American Economic Review, 96 (4): 1069–1090. DOI: 10.1257/aer.96.4.1069Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G11 Portfolio Choice; Investment Decisions