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Growth and decline of assets: On biased judgments of asset accumulation and investment decisions
Stockholm University, Faculty of Social Sciences, Department of Psychology.
Stockholm University, Faculty of Social Sciences, Department of Psychology. Decision Research, Oregon, USA.
2014 (English)In: Polish Psychological Bulletin, ISSN 0079-2993, E-ISSN 1641-7844, Vol. 45, no 1, p. 29-35Article in journal (Refereed) Published
Abstract [en]

Previous research showed that accumulations of capital following stationary interest rates are underestimated byhuman judges. Hyperbolic discounting was suggested as a descriptive and explanatory model for this phenomenon. First,we investigated judged accumulated capital after a period of annual growth and decline. The degree of underestimationincreased with accumulated growth and the results supported hyperbolic discounting as a descriptive model on the grouplevel. However, the hyperbolic model did not apply to the data for one third of the participants. Second, we investigatedhow investment decisions were related to capital accumulation before the investments and to judgments of the possibleoutcomes of the future investments. To our surprise, the participants’ judgments of expected future accumulated capitaldid not add predictive power to predictions based on whether there was growth or decline before the investment decision.Unfortunately this strategy leads to suboptimal investment decisions.

Place, publisher, year, edition, pages
2014. Vol. 45, no 1, p. 29-35
Keywords [en]
investment decisions, discounting, uncertainty, growth, decline
National Category
Psychology
Research subject
Psychology
Identifiers
URN: urn:nbn:se:su:diva-102579DOI: 10.2478/ppb-2014-0005OAI: oai:DiVA.org:su-102579DiVA, id: diva2:711360
Available from: 2014-04-10 Created: 2014-04-10 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: 2019-01-21Bibliographically approved

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