TY  - JOUR
AU  - Barberis,Nicholas
AU  - Huang,Ming
AU  - Thaler,Richard
TI  - Individual Preferences, Monetary Gambles and the Equity Premium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9997
PY  - 2003
Y2  - September 2003
UR  - http://www.nber.org/papers/w9997
L1  - http://www.nber.org/papers/w9997.pdf
N1  - Author contact info:
Nicholas C. Barberis
Yale School of Management
135 Prospect Street
P O Box 208200
New Haven, CT 06520-8200
Tel: 203/436-0777
Fax: 203/432-6970
E-Mail: nick.barberis@yale.edu

Ming Huang
Johnson Graduate School of Management
319 Sage Hall
Cornell University
Ithaca, NY 14853
Tel: 607/255-9594
E-Mail: mh375@cornell.edu

Richard H. Thaler
Booth School of Business
University of Chicago
5807 South Woodlawn Ave
Chicago, IL 60637
Tel: 773/702-5208
Fax: 773/834-9134
E-Mail: richard.thaler@chicagobooth.edu
AB  - We argue that narrow framing, whereby an agent who is offered a new gamble evaluates that gamble in isolation, separately from other risks she already faces, may be a more important feature of decision-making under risk than previously realized. To demonstrate this, we present evidence on typical attitudes to independent monetary gambles with both large and small stakes and show that across a wide range of utility functions, including all expected utility and many non-expected utility specifications, the only ones that can easily capture these attitudes are precisely those exhibiting narrow framing. Our analysis also makes predictions about the kinds of preferences that might be able to address the stock market participation and equity premium puzzles. We illustrate these predictions in simple portfolio choice and equilibrium settings.
ER  -