Stochastic dominance and behavior towards risk: The market for Internet stocks

Wai Mun Fong*, Hooi Hooi Lean, Wing Keung WONG

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

43 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)194-208
Number of pages15
JournalJournal of Economic Behavior and Organization
Volume68
Issue number1
DOIs
Publication statusPublished - Oct 2008

Scopus Subject Areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

User-Defined Keywords

  • Gambles
  • Prospect theory
  • Stochastic dominance
  • Utility functions

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