Volume 11,
Number 1, 2010 Abstracts
© Copyright Taylor & Francis, LLC.
2010
Overly
Optimistic? Investor
Sophistication and the Role of Affective Reactions to Financial Information in
Investors' Stock Price Judgments
Lisa M. Victoravich -
This study investigates the difference in unsophisticated and sophisticated investors' affective reactions to a firm's positive earnings announcement. The study also investigates the variation in the stock price judgments of these two groups as a result of a differential reliance on the affective reaction. It contributes to the literature by providing a further understanding of the differential interpretation and reaction to financial data by investors with varying levels of knowledge and experience. In the experiment, participants were asked to review background financial information about a company, evaluate the company's earnings announcement and make stock price judgments. Results indicate that unsophisticated investors interpret a positive earnings announcement as more favorable than do sophisticated investors. The affective reaction to the earnings announcement was more influential on the stock price judgments of unsophisticated investors when compared to the stock price judgments made by sophisticated investors. This differential effect leads unsophisticated investors to make stock price judgments that exceed stock price judgments made by sophisticated investors. From a back to basics standpoint, these results suggest that investment-related knowledge and experience play a significant role in how individual investors react to and rely on basic financial information, which may be of interest to standard setters and regulators.
Effects of Visual Priming on
Improving Web Disclosure to Investors
Alex Wang -
Timothy Dowding - University of Connecticut-Stamford
This research used online experiments to examine how different types of visual priming affect less knowledgeable and knowledgeable online investors' processing and understanding of disclosure information. It also aimed at addressing what types of visual priming of online disclosure information are most effective at affecting less knowledgeable versus knowledgeable investors regarding their processing and understanding of disclosure information. The results revealed online investors perceived that categorical and semantic priming helped them process and understand the disclosure information better than feature priming. This result was confirmed when investors' knowledge levels did not change how knowledgeable and less knowledgeable investors perceived different types of visual priming. The results concluded that knowledge level did not interact with visual priming to influence investors' processing and understanding of disclosure information.
Investment Decision Making:
Do Experienced Decision Makers Fall Prey to the Paradox of Choice?
Thomas Kida -
Kimberly K. Moreno - Northeastern University
James F. Smith -
Psychology research suggests that decision makers fall prey to the paradox of choice phenomenon, where individuals are less likely to make a decision when faced with an extensive choice set than when faced with a limited choice set. This research may have important implications for investment decision makers in circumstances in which many investment options are available. However, the studies in psychology have typically examined the decisions of individuals who have no particular experience in the decision task. In this study, we examine whether individuals' investment decisions are affected by choice-set size (i.e., a limited vs. extensive choice set) and whether the effect is mitigated or changed for individuals who are more experienced with investment decisions. We find that the paradox of choice phenomenon is evident for participants who are less experienced with investing but not for more experienced participants. In fact, individuals who are more experienced with investment decisions were actually less likely to invest when faced with a limited choice set, contrary to the paradox of choice phenomenon. These findings suggest that the paradox of choice may not exist when individuals with investment experience make their decisions.
Financial Engineering and
Rationality: Experimental Evidence Based on the Monty Hall Problem
Brian Kluger - University
of Cincinnati
Daniel Friedman - University of California at Santa Cruz
Financial engineering often involves reconfiguring existing financial assets to create new financial products. This article investigates whether financial engineering can alter the environment so that irrational agents can quickly learn to be rational. We design two financial assets that embed the Monty Hall problem, a well-studied choice anomaly. Our experiment requires each subject to value one of these assets. Although these assets are equivalent in terms of standard choice theory, valuation experience with one of the assets lowers the subjects' cognitive error rates more than valuation experience with the other asset. We conclude that financial engineering can create learning opportunities and reduce cognitive errors.
The Availability Heuristic
and Investors' Reaction to Company-Specific Events
Doron Kliger
-
Andrey Kudryavtsev -
Contemporary research documents various psychological aspects of economic decision making. The main goal of our study is to analyze the role of the availability heuristic (Tversky and Kahneman [1973, 1974]) in financial markets. The availability heuristic refers to people's tendency to determine the likelihood of an event according to the easiness of recalling similar instances and, thus, to overweight current information as opposed to processing all relevant information. We define and test two aspects of the availability heuristic, which we dub outcome and risk-availability. The former deals with the availability of positive and negative investment outcomes and the latter with the availability of financial risk. We test the availability effect on investors' reactions to analyst recommendation revisions. Employing daily market returns as a proxy for outcome availability, we find that positive stock price reactions to recommendation upgrades are stronger when accompanied by positive stock market index returns, and negative stock price reactions to recommendation downgrades are stronger when accompanied by negative stock market index returns. The magnitude of the outcome availability effect is negatively correlated with firms' market capitalization, and positively correlated with stock beta, as well as with historical return volatility. Regarding risk availability, we find that on days of substantial stock market moves, abnormal stock price reactions to upgrades are weaker, and abnormal stock price reactions to downgrades are stronger. Both availability effects remain significant even after controlling for additional company-specific and event-specific factors, including market capitalization, stock beta, historical volatility of stock returns, cumulative excess stock returns over one month preceding the recommendation revision, rating category before the revision, and number of categories changed in the revision.