Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing
Ming Huang, and
Richard H. Thaler. 2006. "Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing."
American Economic Review,
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)
Article Full-Text Access
Download Data Set
Thaler, Richard H.