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Different investors–different decisions: On individual use of gain, loss and interest rate information
Stockholm University, Faculty of Social Sciences, Department of Psychology, Cognitive psychology.
2017 (English)In: Journal of Behavioral and Experimental Finance, ISSN 2214-6350, E-ISSN 2214-6369, Vol. 15, p. 59-65Article in journal (Refereed) Published
Abstract [en]

This study investigated how accumulating gains and losses, described as annual interest rates, influenced investment behavior. Investments after gains were on average greater than after losses regardless of the gain and loss interest rates. However, greater variance of interest rates gave some weight to that variable for gains but not for losses. We also analyzed the influence from different information cues on each participant’s investments. This revealed that interest rates influenced participants very differently, some invested more with increasing gains, or with increasing losses, while others invested less. This finding explained why interest rate was a weak predictor on the group level. Furthermore, our individual analyses showed an increased sensitivity to interest rates and judged future asset accumulations when the interest rate variance was greater. Finally, subjective reports of the importance of different cues for the participants’ own investments showed only some understanding of the cues influence on the investments.

Place, publisher, year, edition, pages
2017. Vol. 15, p. 59-65
Keywords [en]
information processing, asset judgments, investments, accumulating gain, accumulating loss, interest rate, decision making
National Category
Psychology Economics and Business
Research subject
Psychology
Identifiers
URN: urn:nbn:se:su:diva-150668DOI: 10.1016/j.jbef.2017.07.001ISI: 000417638900007OAI: oai:DiVA.org:su-150668DiVA, id: diva2:1170021
Note

This study was supported by funding from the Department of Psychology, Stockholm University and the Swedish Research Council. The author wants to thank Ola Svenson for valuable comments on earlier versions of the paper.

Available from: 2018-01-02 Created: 2018-01-02 Last updated: 2018-09-17Bibliographically approved
In thesis
1. Interest to Reinvest: Individuals’ use of numerical information for investment decisions
Open this publication in new window or tab >>Interest to Reinvest: Individuals’ use of numerical information for investment decisions
2018 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The general aim of this thesis is to contribute to the understanding of how numerical information, such as asset values and interest rates, influences inexperienced investors in their investment decisions. In relation to this, I have investigated the participants’ own understanding of what information they rely on for their own decisions. I have also investigated how their willingness to wait for greater rewards is related to their investment decisions. Importantly, I have distinguished between average behavior (group behavior) and individual behavior in an attempt to better describe how different information is important for different individual investors.

On the group level the only reliable predictor of investment size was whether there was a gain or a loss during the period before the investment. However, how large the gain or loss was had no, or very limited, influence on investment size. When looking at each investor’s individual decisions, it was revealed that a substantial number of participants actually did rely on information other than only the gain/loss information, for example, the interest rates of forecasted developments of the different investment prospects. Furthermore, a substantial number of participants relied heavily on one of the cues; at least 50% of their investments were explained by the cue relied upon.

Interestingly, very few participants’ investments were influenced by their own judgments of future asset outcomes. Furthermore, the participants’ willingness to invest in funds with guaranteed gains was used as a proxy for time preference (willingness to wait for greater rewards instead of accepting lesser rewards in the present). Time preference was relevant for investments but it did not relate to judged asset outcomes. This indicates that people may be more influenced by their future-oriented preferences rather than by their future-oriented beliefs (judgments).

To conclude, these findings suggest that people use a preference-driven simplified strategy for investments and that these strategies differ substantially between individuals. This corroborates the idea about heuristic thinking, meaning that people simplify their decisions in a way that can deviate from normative value-maximizing behavior. For practical application, it is important to note the variety of strategies among individuals. This variety suggests that there is no “one size fits all” solution regarding instructions that can be given to inexperienced investors. The participants’ very limited insight into what information they relied upon is reason for researchers and advisors to understand the individuality in strategies in greater depth.

Place, publisher, year, edition, pages
Stockholm: Department of Psychology, Stockholm University, 2018. p. 73
Keywords
decision making, investments, interest rate, asset accumulation, information processing, gains, losses
National Category
Applied Psychology
Research subject
Psychology
Identifiers
urn:nbn:se:su:diva-160297 (URN)978-91-7797-382-9 (ISBN)978-91-7797-383-6 (ISBN)
Public defence
2018-11-02, David Magnussonsalen (U31), Frescati Hagväg 8, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following paper was unpublished and had a status as follows: Paper 3: Manuscript.

Available from: 2018-10-10 Created: 2018-09-17 Last updated: 2018-09-27Bibliographically approved

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