Financial Engineering and Rationality: Experimental Evidence Based on the Monty Hall Problem

Financial engineering often involves reconfiguring existing financial assets to create new financial products. This article investigates whether financial engineering can alter the environment so that irrational agents can quickly learn to be rational. We design two financial assets that embed the M...

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Bibliographic Details
Published inThe journal of behavioral finance Vol. 11; no. 1; pp. 31 - 49
Main Authors Kluger, Brian, Friedman, Daniel
Format Journal Article
LanguageEnglish
Published Philadelphia Taylor & Francis Group 01.01.2010
Erlbaum
Taylor & Francis Ltd
Subjects
Anlageverhalten
Choice anomalies
Cognition & reasoning
Engineering
Experimental finance
Financial Engineering
Framing
Investment products
Learning
Probability
Spieltheorie
Studies
Valuation
Verhaltensökonomik
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Summary:Financial engineering often involves reconfiguring existing financial assets to create new financial products. This article investigates whether financial engineering can alter the environment so that irrational agents can quickly learn to be rational. We design two financial assets that embed the Monty Hall problem, a well-studied choice anomaly. Our experiment requires each subject to value one of these assets. Although these assets are equivalent in terms of standard choice theory, valuation experience with one of the assets lowers the subjects' cognitive error rates more than valuation experience with the other asset. We conclude that financial engineering can create learning opportunities and reduce cognitive errors.
Bibliography:SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:1542-7560
1542-7579
DOI:10.1080/15427561003590100