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Nominal or proportional investments: Investment strategies, judgments of asset accumulations and time preference
Stockholm University, Faculty of Social Sciences, Department of Psychology, Cognitive psychology.
(English)Manuscript (preprint) (Other academic)
Abstract [en]

According to Prospect theory, we judge and decide in relation to a reference point. Furthermore, it has been found that we perceive amounts differently depending on if people are asked about percentages or actual amounts of currency. Therefore, in this study, the effects of response format (amount of SEK or percentage of assets) on long term investment decisions were investigated. I also investigated the relation between investments and subjective judgments of asset accumulations, as well as time preference (the willingness to wait for greater rewards). Average investments were greater followings gains compared to losses, but there was no statistically significant effect of response format. The gain/loss factor was the best predictor of average investments, independent of gain/loss size. Judgments of accumulated assets were weakly related to investments and time preference, but time preference was closely related to investments. I also wanted to know how participants used the information in the problems. Therefore, how important different kinds of information were for each individual participant’s investments was analyzed. This revealed that that it was more common in the currency condition, compared to the percentage condition, to rely heavily on forecasted future interest rates, but also to ignore this information completely. In conclusion, information processing is very diverse and how people are asked to invest can change what information they focus on or ignore.

Keywords [en]
Investments, response format, interest rates, accumulation, assets
National Category
Applied Psychology
Research subject
Psychology
Identifiers
URN: urn:nbn:se:su:diva-160296OAI: oai:DiVA.org:su-160296DiVA, id: diva2:1248811
Available from: 2018-09-17 Created: 2018-09-17 Last updated: 2018-09-19Bibliographically 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: 2019-01-21Bibliographically approved

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