Volume 9, Number 2, 2008 Abstracts
© Copyright Taylor & Francis, LLC. 2008

Commentary: Moving from an Efficient to a Behavioral Market Hypothesis
Donald J. Smith - Boston University

Behavioral finance typically is introduced in investments courses in the context of the efficient markets hypothesis (see, e.g., the widely used textbooks by Bodie, Kane, and Marcus [2002] and Reilly and Brown [2003]). This note offers a diagrammatic approach to “position” visually behavioral finance between the information available to market participants and their investment decisions.

Biases in Individual Forecasts: Experimental Evidence
Lucy F. Ackert - Kennesaw State University
Bryan K. Church - Georgia Tech
Kirsten Ely - Sonoma State University

Trueman [1994] provides a model of forecasting behavior in which analysts do not always make forecasts that are consistent with their private information. Using Trueman's model to provide theoretical direction, we conduct six experimental sessions to investigate individual forecasting behavior. In each session, four individuals predict earnings based on possibly divergent information. We manipulate forecast ability so that two individuals are strong analysts and two are weak. In three sessions, forecasts are released simultaneously. We find that forecasts do not always reflect private information. Both weak and strong analysts make forecasts that are inconsistent with private information, although the behavior is much more pronounced for weak analysts. In another three sessions, forecasts are released sequentially. We find that weak second analysts engage in herd behavior: that is, they mimic the reporting behavior of the first analyst. In contrast, strong second analysts are unaffected by the reporting behavior of the first analyst. The overall findings are consistent, in spirit, with the forecasting behavior suggested by Trueman [1994].

The Stock Market Bubble, Shareholders' Attribution Bias and Excessive Top CEO Pay
Gueorgui I. Kolev - Universitat Pompeu Fabra, Barcelona, Spain

I use aggregate time series data on profits in the corporate sector, Standard and Poor's Composite Stock Price Index, and the average total pay of the top 100 CEOs to look for evidence in favor or against a fundamental attribution bias-based explanation of the recent explosive growth in CEO pay. I hypothesize that shareholders overattribute prominent increases and decreases in the prices of corporate stocks to the leadership and skill of the CEOs and underplay the role of stock market fluctuations, which are beyond CEO control. I recast this hypothesis as a simple endogeneity test, and I cannot reject the view that market fluctuations mechanically cause changes in CEO compensation with no detectable reverse causality. Further I find that, in the aggregate data increases in CEO pay decrease corporate profits. To complement the time series evidence, I use 4-factor model risk-adjusted returns as a direct measure of CEO skill. I show that in the cross section the relationship between individual CEO pay and skill is very weak (economically small and statistically insignificant). I conclude that in the late1990s stock market bubble period shareholders were taken for a ride and ended up paying huge amounts of money to their CEOs for no rational reasons.

Testing Intentional Herding in Familiar Stocks: An Experiment in an International Context
Natividad Blasco - Vicerrectorado de Planificacion
Sandra Ferreruela - University of Zaragoza

This paper examines the intentional herd behaviour of market participants within different international markets (Germany, United Kingdom, United States, Mexico, Japan, Spain and France) using a new approach that permits the detection of even moderate herding over the whole range of market return. This approach compares the cross-sectional deviation of returns of each of the selected markets with the cross-sectional deviation of returns of an “artificially created” market free of herding effects. We suggest that intentional herding is likely to be better revealed when we analyse familiar stocks. The results show that only the Spanish market exhibits a significant herding effect.

Interactions of Individuals' Company-Related Attitudes and Their Buying of Companies' Stocks and Products
Jaakko Aspara - Helsinki School of Economics
Henrikki Tikkanen - Helsinki School of Economics

Although increasingly interested in individual investors' behavior and psychology, finance research has paid little attention to the fact that the same individuals who engage in investment behavior and trading of stocks of certain companies may also engage in other economic behavior, notably in the consumption of products. Recognizing this, as well as the increasing evidence of the role of company-related attitudes in individuals' investment behavior, the article presents a theoretical model concerning how an individual's company-related attitudes, his/her tendency to buy/hold the company's stocks, and his/her tendency to buy/use the company's products are likely to interact. The proposed interaction is suggested to generate a potentially considerable leverage effect, ultimately on the stock price of a company.

Is Satisficing Absorbable? An Experimental Study
Werner Guth - Max Planck Institute of Economics
M. Vittoria Levati - Max Planck Institute of Economics
Matteo Ploner - Max Planck Institute of Economics

We experimentally investigate whether the satisficing approach is absorbable, that is, whether it still applies when participants become aware of it. In a setting where an investor decides between a riskless bond and either one or two risky assets, we familiarize participants with the satisficing calculus applied to specific portfolio selection tasks. After experimenting with this calculus repeatedly, participants can either continue using it or select their portfolio freely. The results reveal some absorbability of the satisficing approach in the simpler two-state setting, whereas more complexity renders the satisficing heuristics more difficult and their absorption less likely.