Document Type

Journal Article

Department/Unit

Department of Economics

Language

English

Abstract

Internet stocks registered large gains in the late 1990s, followed by large losses from early 2000. Using stochastic dominance theory, we infer how investor risk preferences have changed over this cycle, and relate our findings to utility theory and behavioral finance. Our major findings are as follows. First, risk averters and risk seekers show a distinct difference in preference for Internet versus “old economy” stocks. This difference is most evident during the bull market period (1998–2000) where Internet stocks stochastically dominate old economy stocks for risk seekers but not risk averters. In the bear market, risk averters show an increased preference for old economy stocks, while risk seekers show a reduced preference for Internet stocks. These results are inconsistent with prospect theory and indicate that investors exhibit reverse S-shaped utility functions.

Keywords

Stochastic dominance, Prospect theory, Utility functions, Gambles

Publication Date

2008

Source Publication Title

Journal of Economic Behavior & Organization

Volume

68

Issue

1

Start Page

194

End Page

208

Publisher

Elsevier

Peer Reviewed

1

DOI

10.1016/j.jebo.2008.03.013

Link to Publisher's Edition

http://dx.doi.org/10.1016/j.jebo.2008.03.013

ISSN (print)

01672681

Included in

Economics Commons

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