Volume
6, Number 1, 2005 Abstracts
©
Copyright Erlbaum 2005
Editorial
Commentary: Corporate Governance: Incentive, Conflict of Interest and Bias
Akin Sayrak-University
of
Laxmikant Shukla-University of
Individual Investor Preferences: A
Geoffrey Soutar-University
of
As the baby boomers age, individuals are being
encouraged to take responsibility for their retirement income. Despite the
importance of individual investment decisions, we know very little about what
factors influence them. Having identified characteristics that are important to
individual investors in shares using a conjoint analysis approach, this study
uses cluster analysis and discriminant analysis to
look for subgroups with differing attitudes and approaches to investment
alternatives. Results suggest that four significant subgroups exist within the
investor sample, each with different investment preferences and goals. The
results have implications for providers of financial services and for those
involved in educating individual investors.
Switching
Investments Can Be a Bad Idea When Parrondo's
Many studies have indicated that a buy-and-hold investment strategy is superior
to a trading strategy. This is thought to be true because trading incurs
transaction costs that lower net returns compared to a buy-and-hold strategy.
We propose a behavioral finance argument to illustrate that merely switching
between positive expected return assets can lead to a long-run negative
expected return, even when transaction costs are ignored. This counterintuitive
result may obtain because of Parrondo's Paradox. We
provide a stylized theoretical example that demonstrates how a trader can lose
money by trading between assets with positive long-run expected returns. We
also present simulation results to support our example. Thus, long-run negative
results from trading may not be due entirely to transaction costs. A trading
strategy may prove inferior to buy-and-hold for agents simply because of their
singular trading patterns, as we outline in the paper.
Numerical
Information Format and Investment Decisions: Implications for the Disposition
Effect and the Status Quo Bias
Enrico Rubaltelli-University of
Modena and Reggio Emilia
Sandro Rubichi-University of
Modena and Reggio Emilia
Lucia Savadori-University
of Trento
Marcello Tedeschi-University
of Modena and Reggio Emilia
Riccardo Ferretti-University of
Modena and Reggio Emilia
Investment decisions are very difficult because they involve money and can
impact our quality of life. According to the axioms of rationality, different
but equivalent information formats should not affect investment strategies. The
authors perform two experiments here, and find evidence of a strong absolute
magnitude effect on investment decisions. In Experiment 1, participants
(students) chose to sell a losing fund more often when returns were expressed
as a percentage of variation between the buying value and the actual value
(e.g., 24%) than when they were expressed as a monetary difference between the
buying price and the actual price (e.g., $0.24). In the context of the
experiment, the percentage format decreased the disposition effect
significantly. Furthermore, describing the stock returns as ratios (e.g., 1/4)
increased the tendency toward the status quo bias. In Experiment 2, the authors
showed that the absolute magnitude of the numbers shaped participants'
satisfaction with fund returns, and was responsible for the different choices
of investment strategies.
Self is Never Neutral: Why Economic Agents Behave Irrationally
Modern economics understands utility from the concept of decision utility
inferred from individual choice making. It explains agents' decisions or
choices in turn by the paradigm of utility maximizing. From our perspective,
however, this is a fatal mistake because economic agents do not always choose
what they really want in order to maintain their "self-value." In
fact, subjects are never neutral. When agents are not able to obtain something
they want, they downplay its desirability in order to get psychological
satisfaction. But when they are forced to accept what they do not want, they
try to rationalize that they really did want it, again in order to save face.
Although such "irrational" behavior may decrease economic utility, it
gives agents psychological satisfaction and subjective comfort, thus increasing
their immaterial utility. In this sense, agents remain rational when conducting
such behaviors, even though they run directly contrary to neoclassical
rationality concepts.
Volume
6, Number 2, 2005 Abstracts
©
Copyright Erlbaum 2005
The Timing Ability
of Newly Listed NYSE Firms, 1926-1962
Tim Loughran-University
of Notre Dame
Jennifer Marietta-Westberg-Michigan
State University
We demonstrate that, from 1926 to 1962, the number of new listings on the New
York Stock Exchange has predictive ability for future aggregate market returns.
The forecasting power of new listings is evident even after controlling for
previously documented market predictors, such as the dividend yield. While firms
do not appear to time their own performance, tests investigating aggregate
market movements around new listing dates are consistent with forecasting
ability of the new listing variable. In particular, we use non-parametric
regression methods to determine the functional relationship between one-year
post-market returns and new listings. We find a decreasing trend in the
expected one-year post-market return as a function of the number of new
listings each quarter. Subsequent tests show that mean reversion in market
returns does not drive the predictive evidence found here.
Asset Allocation
and Information Overload: The Influence of Information Display, Asset Choice,
and Investor Experience
Julie R. Agnew-The College of William
and Mary
Lisa R. Szykman-The
College of William and Mary
This paper examines whether information overload might partially explain why
defined contribution plan participants tend to follow the "path of least
resistance" (Choi et al. [2002]) In two
experiments, we test how three common differences among defined contribution
plans (the number of investment choices offered, the similarity of the choices,
and the display of the choices) lead to varying degrees of information overload
and the probability of opting for the default. Notably, we control for the
financial aptitude of each individual. The findings suggest that the success of
certain plan features depends strongly on the financial background of the
participant. We find that low-knowledge individuals opt for the default
allocation more often than high-knowledge individuals (experiment 1: 20% versus
2%). The results emphasize the importance of plan design, especially the
selection of plan defaults, and the need to improve the financial literacy of
participants.
Limit Order
Trading Behavior and Individual Investor Performance
Alexander Anderson-Deutsche Bank
Julia Henker-University
of
Sian Owen-University of
Using highly detailed data from a major Australian online broker,
we investigate individual investors' limit order behavior and performance. We
examine relative performance categorized by number and size of limit orders
placed, and by proportion of orders that execute. We find that individuals who
place the most orders and have the highest number of transactions enjoy higher
returns than those with the fewest orders and transactions. The best performers
have the highest proportion of orders execute and place smaller orders than the
worst performers. These findings are robust after controlling for stock
characteristics with the Fama and French [1992]
factor model.
Framing Effects,
Selective Information, and Market Behavior: An Experimental Analysis
Erich Kirchler-University
of Vienna
Boris Maciejovsky-Massachusetts
Institute of Technology
Martin Weber-University of Mannheim
The results of an asset market experiment, in which sixty-four subjects trade
two assets on eight markets in a computerized continuous double auction,
indicate that objectively irrelevant information influences trading behavior.
We find that positively and negatively framed information leads to a particular
trading pattern, but leaves trading prices and volume unaffected. The
experiment also provided support for the disposition effect. Participants who experience
a gain sell their assets more rapidly than participants who experience a loss,
and positively framed subjects generally sell their assets later than
negatively framed subjects.
Volume
6, Number 3, 2005 Abstracts
©
Copyright Erlbaum 2005
Bidding and
Overconfidence in Experimental Financial Markets
W. David Allen-University of
Dorla A. Evans-University of
Overconfidence is a well-documented phenomenon in psychology. Psychologists
define an overconfident individual as one who believes he has more accurate
information than he actually does. Recently, behavioral economists have become
interested in the implications of trader overconfidence for financial
decision-making and the functioning of financial markets. To date, most
financial market studies have been analytical in nature. These studies assume
that traders are overconfident and model decision-making behavior accordingly.
Rather than assuming the presence of overconfidence, we use experimental
bidding data to determine the extent to which trader overconfidence exists, and
what variables suggested by previous finance and psychology research relate to
it. We find approximately 40% of subjects exhibited overconfidence. Variables
that distinguish overconfident bidding from risk-averse and risk-neutral
bidding include the traditional financial variables that explain bidding
(expected value and standard deviation), non-traditional financial variables,
and variables relating to the self-attribution bias and feedback. Contrary to
what some analysts have suggested, experience did not reduce overconfidence.
The Perception of
Control and the Level of Overconfidence: Evidence from Analyst Earnings
Estimates and Price Targets
Olaf Stotz-RWTH
Aachen University
Rudiger von Nitzsch-RWTH Aachen
University
The majority of analysts failed to predict the recent stock market downturn at
all, or, if they did, then not to its full extent. Apart from the well-known
conflicts of interest, forecasts can be distorted by psychological factors. On
average, financial analysts forecast earnings and prices with a positive bias.
This study examines why financial analysts are overconfident, i.e., why they
overestimate their abilities to forecast earnings and prices. Our empirical
findings support the hypothesis that overconfidence intensifies with an
increasing perception of control.
Development and
Validation of a Model and Measure of Financial Risk-Taking
Niklas Lampenius-Universitat der Bundeswehr in
This study presents a theoretical model and assessment tool that measures
individual differences in risk-aversion in financial matters. Unlike other
measures of financial risk-taking, this measure assumes no prior technical
knowledge of finance. The assessment tool was developed using item response
theory as well as classical test theory methods. The measure is tested for
predictive validity through various procedures and proves to have those
properties. In addition the measure is tested for construct validity using
structural equation modeling and allows for the successful classification of
individuals in one of four classifications: Non-Investor, Risk Managing
Investor, Conservative Investor, and Speculator. We discuss potential
applications of this measure.
Social Mood and
The general level of optimism/pessimism in society is reflected by the emotions
of financial decision-makers. Because these emotions are correlated across
economic participants, our hypothesis leads to three important outcomes. First,
social mood determines the types of decisions made by consumers, investors, and
corporate managers alike. Extremes in social mood are characterized by
optimistic (pessimistic) aggregate investment and business activity. Second,
due to the efficient and emotional nature of stock transactions, the stock
market itself is a direct measure or gauge of social mood. Third, since the
tone and character of business activity follows, rather than leads, social
mood, stock market trends help forecast future financial and economic activity.
Specific predictions about stock market levels and trading volume, market
volatility, firm expansion, leverage use, and IPO and M&A activity are also
given.
Volume
6, Number 4, 2005 Abstracts
©
Copyright Erlbaum 2005
Risk Aversion and
Personality Type
Greg Filbeck-University of Wisconsin-La Crosse
Patricia Hatfield-Bradley University
Philip Horvath-Bradley University
The finance literature supports an increasing role for behavioral aspects of investment decision-making. Among other factors such as demographics, personality type may influence risk tolerance as well. This paper explores the relationship between personality type dimensions of the Myers-Briggs Type Indicator (MBTI) and the moments approach to individual investor risk tolerance inherent in expected utility theory (EUT). Our study uses survey results to relate ex ante EUT tolerance for variance and skew to MBTI measures. Results indicate that personality type does explain individual ex ante EUT risk tolerance. Our results further suggest that the relationship between personality type and individual ex ante EUT risk tolerance is non-linear in form.
Gender Stereotypes
in Advisors' Clinical Judgments of Financial Risk Tolerance: Objects in the
Mirror Are Closer than They Appear
A sample of 183 financial advisors and 290 advisory clients was used to determine the degree of correspondence between advisors' subjective clinical judgments about their clients' financial risk tolerance and the clients' actual financial risk tolerance. The correlation between the estimates and the actual measures was 0.41. It was further determined that advisors overestimated the risk tolerance of men and underestimated the risk tolerance of women. This distortion could not be attributed to income or wealth differences between the males and females.
Orientation Toward
Finances: Development of a Measurement Scale
Ellen Loix-Vrije
Universieit Brussel
Roland Pepermans-Vrije
Universieit Brussel
Cindy Mentens-Vrije
Universieit Brussel
Maarten Goedee-Vrije
Universieit Brussel
Marc Jegers-Vrije
Universieit Brussel
The construct of orientation toward finances has been developed to focus on individual behavioral dispositions related to personal financial management activities. Based on input from different literature sources, we sought to operationalize the construct using items referring to behavioral competencies. This measurement scale has further been tested and analyzed, resulting in two subfactors: Financial Information, and Personal Financial Planning. We obtained acceptable reliability and validity results for both factors through various studies. Cross-validity testing and confirmatory analysis further supported the robustness of the final two-factor measurement scale.
A Behavioral
Approach To Efficient
Muhammet Mercan-Yapi Kredi Yatirim
This paper investigates the portfolio performance of subjective forecasts given in different forms. In constructing the efficient frontier, we base the expectation formation processes on subjective forecasts and human behavior, rather than on past prices. We construct the efficient portfolios first, using point, interval, and probabilistic forecasts. Next, we compare their performance to portfolios constructed using the standard time series data approach. Subjective forecasts are provided by actual portfolio managers who forecast stock prices on a real-time basis. Our first contribution is to show that the portfolio performance of subjective forecasts is superior to those of standard time series modeling. Our second contribution lies in the fact that we use experts as forecasters, professional fund managers with substantive expertise. Our third contribution is that we investigate the expert subjects' forecasts using point, interval, and probabilistic forecasts, which renders our findings robust to the task format.
Research Elsewhere
Robert A. Olsen-Decision Science
Research Institute
Book Reviews
Robert A. Olsen-Decision Science
Research Institute