Abstract
We suggest a behavioral perspective for the demand for risky assets (DRA) in which the risk-free rate affects this demand: the lower the risk-free rate the higher the demand for risky assets. This perspective is based on the idea that changes in return exhibit decreasing sensitivity, that is, the impact of a change diminishes with the distance from the status quo (or reference point). We begin by demonstrating that when the risk-free rate decreases, DRA increases even among sophisticated subjects. We then provide support for our behavioral model in three experiments in which the risk-free rate is manipulated and demand for risky assets is measured. Experiments 1 and 2 rule out alternative explanations, demonstrating that decreasing sensitivity underlies, at least in part, the effect of the risk-free rate on DRA. Experiment 3 demonstrates the role of decreasing sensitivity when returns are presented in terms of monetary payoffs rather than interest rates.
| Original language | English |
|---|---|
| Pages (from-to) | 23-27 |
| Number of pages | 5 |
| Journal | Journal of Behavioral and Experimental Economics |
| Volume | 76 |
| DOIs | |
| State | Published - Oct 2018 |
| Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2018
Funding
We thank Doron Sonsino (the associate editor), two anonymous referees, Ido Erev, Doron Kliger, Hersh Shefrin, Doron Sonsino, Meir Statman and the participants in the First Incentives and Behavior Change Conference (2016) at Tel Aviv University and The Second Israel Behavioral Finance Conference (2017) in Tel Aviv 2017 for helpful comments and suggestions. We thank the Henry Crown Institute of Business Research in Israel for financial support.
| Funders | Funder number |
|---|---|
| Henry Crown Institute of Business Research in Israel |