Ted Martin Hedesström
|Publicerad i||Journal of Behavioral Finance|
Centrum för finans
Institutionen för nationalekonomi med statistik
|Ämnesord||stock purchase; bonus; bounded rationality; heuristic judgement; hyperbolic time discounting|
|Ämneskategorier||Tillämpad psykologi, Nationalekonomi|
Performance-related bonuses are important tools for investment organizations to incentivize stock traders. Yet, two experiments indicate that bonuses rewarding short-term performance may lead to worse timing of purchases. We propose that hyperbolic time discounting make participants set lower aspired purchase prices for short-term (decreasing percentage) bonuses than long-term (increasing percentage) bonuses. For this reason purchases are made earlier for decreasing than increasing percentage bonuses, earlier for decreasing than random prices, and earlier for high than low price volatility. Neither purchases at lowest price or highest bonus are attained. Hyperbolic time discounting may account for bubbles observed in experimental double-auction markets.