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Motivated beliefs, social preferences, and limited liability in financial decision-making

Author

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  • Ahrens, Steffen
  • Bosch-Rosa, Ciril
Abstract
Using a new experimental design, we compare how subjects form beliefs in an investor-client setup under varying degrees of liability. Our results reflect the importance of social preferences when making investment decisions for others. We show that when investors have no liability, those with stronger social preferences are more optimistic about the probability that their investment results in a gain. In other words, we find that social preferences appear to be correlated with motivated beliefs. This finding suggests the existence of cognitive biases in financial decision-making and supports the recent literature on the formation of motivated beliefs under limited liability (Barberis, 2015; Bénabou and Tirole, 2016).

Suggested Citation

  • Ahrens, Steffen & Bosch-Rosa, Ciril, 2022. "Motivated beliefs, social preferences, and limited liability in financial decision-making," Discussion Papers 2022/8, Free University Berlin, School of Business & Economics.
    • Handle: RePEc:zbw:fubsbe:20228
    DOI: 10.17169/refubium-36335
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    References listed on IDEAS

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    More about this item

    Keywords

    Moral Hazard; Experiment; Motivated Beliefs; Social Preferences;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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