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Too risky to hedge: An experiment on narrow bracketing

Jiakun Zheng & Ling Zhou

Experimental Economics2025https://doi.org/10.1017/eec.2025.1article
AJG 3ABDC A*
Weight
0.41

Abstract

Narrow bracketers who are myopic in specific decisions would fail to consider preexisting risks in investment and neglect hedging opportunities. Growing evidence has demonstrated the relevance of narrow bracketing. We take a step further in empirical investigation and study individual heterogeneity in narrow bracketing. Specifically, we use a lab experiment in investment and hedging that elicits subjects’ preferences on rich occasions to uncover the individual degree of narrow bracketing without imposing distributional assumptions. Combining prospect theory and narrow bracketing can explain our findings: Subjects who invest more also insure more, and subjects insure significantly less in the loss domain than in the gain domain. More importantly, we show that the distribution of the individual degree of narrow bracketing is skewed at two extremes, yet with a substantial share of people in the middle who partially suffer from narrow bracketing. Neglecting this aspect, we would overestimate the severity of narrow bracketing and misinterpret its relation with individual characteristics.

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https://doi.org/https://doi.org/10.1017/eec.2025.1

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@article{jiakun2025,
  title        = {{Too risky to hedge: An experiment on narrow bracketing}},
  author       = {Jiakun Zheng & Ling Zhou},
  journal      = {Experimental Economics},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1017/eec.2025.1},
}

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Evidence weight

0.41

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.25 × 0.4 = 0.10
M · momentum0.55 × 0.15 = 0.08
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.