Review of Behavioral Economics > Vol 3 > Issue 3-4

Buying and Selling Risk: An Experiment Investigating Evaluation Asymmetries

Werner Güth, LUISS Guido Carli, Italy and MPI on Collettive Goods, Germany, gueth@coll.mpg.de , Matteo Ploner, University of Trento, Italy, matteo.ploner@unitn.it , Ivan Soraperra, CREED, University of Amsterdam, The Netherlands, i.soraperra@uva.nl
 
Suggested Citation
Werner Güth, Matteo Ploner and Ivan Soraperra (2016), "Buying and Selling Risk: An Experiment Investigating Evaluation Asymmetries", Review of Behavioral Economics: Vol. 3: No. 3-4, pp 389-419. http://dx.doi.org/10.1561/105.00000055

Publication Date: 23 Dec 2016
© 2016 W. Güth, M. Ploner, and I. Soraperra
 
Subjects
Economic theory,  Financial markets
 
Keywords
JEL Codes: D81D03C91
WTP-WTA gapRiskElicitation mechanismsProbability weighting
 

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In this article:
1. Introduction 
2. The Endowment Effect when Trading Lotteries 
3. Method 
4. Results 
5. Discussion and Conclusions 
A. Instructions to Participants 
B. Econometric Estimation: Details 
C. Robustness Check 
D. Pooled NLS regressions 
E. Costs of the Elicitation Mechanisms 
References 

Abstract

We experimentally investigate the Willingness To Pay (WTP)- Willingness To Accept (WTA) gap in the evaluation of risky assets, i.e., binary monetary lotteries. We compare the random price mechanism and an elicitation method preserving truly social trading, without theoretically sacrificing mutual incentive compatibility. The usual asymmetry in evaluation by sellers and buyers is confirmed, for both elicitation mechanisms. An econometric estimation sheds new light on the cause: potential buyers are over-pessimistic and systematically underweight the probability of a good outcome.

DOI:10.1561/105.00000055