Abstract - Bounded Rationality and Financial Decision Making

In the simple setting where an investor essentially decides between riskless bonds and risky asset we distinguish three aspiration levels: a lowest threshold which one wants to guarantee, the aspiration level given by investing all risk-free, and an even higher return level representing a real success. The ranges for such aspiration are naturally determined by the parameters of the setup. Assuming that investors try to improve the chances of reaching higher aspiration levels, these three aspirations allow us to classify investors as risk shy ore more open to risk. In the experiment participants are first asked for the lowest and highest aspiration before investing. Thus we can test whether they behave as predicted by their aspiration type. By presuming specific cardinal utility functions, we can also compare this to the rational choice-approach.

Werner Güth
Max Planck Institute for Research into Economic Systems, Jena (Germany)
09.Nov 2004

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