Volume 14, Number 1, 2013 Abstracts
© Copyright Taylor & Francis, LLC. 2013

Are Investors Rational? Evidence on the Impact of Industrial Framing Reclassification on Stock Market Reaction
Tsung-Cheng Chen - National Changhua University of Education
Mei-Ying Lai - Tainan University of Technology

This study utilizes the overall reclassification of industries policy to explore the postannouncement performance from a behavioral finance perspective. The presentation framing of the biotechnology and medical care industry is one with certainty prospects. This suggests that investors tend to buy more of these stocks because the government emphasizes the importance of this industry since 2002, which induces a significantly positive price effect. However, the reclassified eight electronic-related industries reveal presentation framings with uncertainty prospects. The heterogeneity of the high-technology industry thus leaves investors less tendency to hold these stocks and in turn a negative price effect. This paper shows some evidence and implication, suggesting a link between the presentation framing of industries and investors’ behavior.

Familiarity Bias and Perceived Future Home Price Movements
Michael J. Seiler - Old Dominion University
Vicky L. Seiler - Johns Hopkins University
David M. Harrison - Texas Tech University
Mark A. Lane - Old Dominion University

This study empirically confirms the existence of the status quo deviation aversion hypothesis, but not increasing status quo deviation aversion, in people who own their primary residence. The examination was conducted in the 20 Case-Shiller Metropolitan Statistical Areas across the country. The results are systemic and do not vary substantially by demographic characteristics. However, variations are noted with different levels of real estate knowledge, income, purchase motive, relative home tenure, and excess relative housing risk.

Framing the Initiation of Analyst Coverage on IPOs
Simona Mola - U.S. Securities and Exchange Commission

Using a large sample of recommendations from 1997 to 2007, this article shows that analysts often downgrade a seasoned stock prior to initiating research coverage on an initial public offering (IPO). Downgrades are more likely to occur if the analyst's investment bank has no underwriting relationship with the seasoned firm. From 1997 to 2001, I find some evidence supporting the hypothesis of strength of analyst coverage: downgrades by analysts affiliated with the IPO lead manager were negatively associated with the IPO's price performance after the offering day. Analysts were likely to downgrade a seasoned stock prior to promoting a cold IPO, underwritten by their investment bank. Since 2002, when new rules on analyst independence were adopted, downgrades of seasoned stocks have become unrelated to the price performance of IPOs.

Risk Preferences, Investor Sentiment and Lottery Stocks: A Stochastic Dominance Approach
Wai Mun Fong - National University of Singapore

Lottery stocks are a puzzle: individual investors value these stocks highly despite their low average returns and high volatility (Kumar [2009]). I argue that individuals are attracted to lottery stocks because they are risk-seeking and sentiment-prone. Because risk preferences are not directly observable, I use a model-free approach based on stochastic dominance to infer aggregate risk preferences. I also use a direct measure of individual investor sentiment, the bull-bear spread, to test whether sentiment affects the returns of lottery stocks. My results show that lottery stock investors are indeed risk seekers. Sentiment also plays an important role in explaining the demand and returns of lottery versus nonlottery stocks. The lottery stock puzzle can thus be understood only by incorporating unusual risk preferences and the propensity for individual investors to trade on sentiment.

The Effect of a High-Risk Stock Fund on Long-Term Investment: An Experimental Study
Uri Benzion - The Western Galilee College
Lena Krupalnik - Ben-Gurion University
Tal Shavit - The College of Management Academic Studies

This article presents a multitrial experiment that extends the classic experiment of Thaler et al. [1997] by adding a high-risk stock fund to the bond and stock funds used in the original experiment. Results from the study show that investors allocate the same proportion of their investment to the high-risk stock fund and the stock fund, increasing their investment in the stocks and their expected return. We conducted a similar experiment with all three assets and found no myopic loss aversion. We suggest that high-risk stock funds might reduce the effect of myopic loss aversion.

DOSPERT's Gambling Risk-Taking Propensity Scale Predicts Excessive Stock Trading
Łukasz Markiewicz - Kozminski University
Elke U. Weber - Columbia Business School

Using a data set that combines trading records in a financial investment simulation with survey responses, this study provides evidence that a domain-specific variant of risk-taking propensity, namely risk taking in gambling (but not in investing) situations, predicts the volume of trades of financial investors. We find that investors’ gambling risk-taking propensity, measured by the Weber, Blais, and Betz [2002], Domain-Specific-Risk-Taking (DOSPERT) gambling subscale, increases the number of trades made and hence transaction costs, as well as the extent of their day trading. The short (four-item) gambling risk-taking propensity DOSPERT subscale thus provides a useful diagnostic addition to risk attitude assessment instruments for private investors.

Investment Archetypes
Jason A. Voss - CFA Institute Content Director of Behavioral Finance and Asoapovo Productions, Inc.

Priming is a well-researched phenomenon in behavioral finance. A form of priming is the susceptibility of the mind to archetypes, or generalizations of businesses and individuals. Investment archetypes can lead to faulty financial decision making.


Volume 14, Number 2, 2013 Abstracts
© Copyright Taylor & Francis, LLC. 2013

Greed and Fear in Financial Markets: The Case of Stock Spam E-Mails
Bill Hu - Cleveland State University
Thomas McInish - The University of Memphis

Using a rich dataset of stock spam e-mails as a laboratory, we test and find support for three behavioral finance theories related to investor attention, ambiguity, and overweighting of low probability outcomes. First, we find that both the dollar volume and return on the peak day of the spam campaigns (SCs) are significantly higher compared to those on randomly selected non-spam dates. In addition, SCs reduce the number of zero trading days while the campaign is underway. Second, e-mails with a target price have significantly higher abnormal dollar volume and abnormal return on the peak day of the SC than e-mails without a target price. Thus, individual investors favor bets with unambiguous payoffs, which supports the ambiguity hypothesis. Finally, when the target price indicated in spam e-mails is about 53 times the current price, the abnormal return of the SC peaked at 31%. We document a nonlinear relationship between abnormal return on the peak day of the SCs and the premium implied in the spam e-mails. Although investors overweight low probability events, the overweighting decreases when the probability becomes out of reach. Our findings concerning target price are consistent with cumulative prospect theory.

An Exploratory Inquiry into the Psychological Biases in Financial Investment Behavior
Shalini Kalra Sahi - FORE School of Management
Ashok Pratap Arora - Management Development Institute
Nand Dhameja - Indian Institute of Public Administration

The purpose of this article is to identify the beliefs and attitudes of the individual investors with regard to financial investment decision making, with particular reference to the investor biases, by conducting an in-depth study of investor beliefs and preferences. In total, 30 exploratory semi-structured interviews were conducted to identify and describe the underlying thoughts and feelings that affect the individual investment decision-making behavior. Decision-making rationales are analyzed by means of open coding of verbal data. The findings of the in-depth interviews indicated that individual investors have numerous beliefs and preferences that bias their financial investment decisions. These biases reveal the design of the investor's mind rather than flaws of the investor's mind. This study suggests that an understanding of an individual investor's psychology would help in better comprehending the way the individual investment decisions are made. The value of this research lies in its methodology and analysis. Perceptions and beliefs of the financial consumer with regard to their financial investment biases have not been explored earlier, so this article contributes to new knowledge in terms of financial product buying behavior.

The Behavior of Institutional and Retail Investors in Bursa Malaysia during the Bulls and Bears
Ming-Ming Lai - Multimedia University
Siow-Hooi Tan - Multimedia University
Lee-Lee Chong - Multimedia University

This paper examined the behavior of institutional and retail investors in Malaysia during the bulls and bears. The results revealed significant differences in behavioral patterns between these two groups of investors. For the institutional investors, obvious differences were found in the areas of overconfidence, liquidity preference, and price anchoring between these two distinct market trends. As for the retail investors, there were no obvious difference in investing behavior except in terms of liquidity preference and self-control. The overall results indicated that both investors exhibited overconfidence during both periods; nonetheless, they were somewhat rational by exercising self-control and being concerned with liquidity when making investment decisions. Both investors ranked dividend yield as the most important fundamental variable particularly during bearish market outlook. On the other hand, trend analysis was rated as the most important variable closely watched technical indicator during bullish market outlook. Consistent with the findings of both surveys, we provide evidence that dividend yield appeared to be significant risk factor as well.

Robert B. Durand - Curtin University
Rick Newby - The University of Western Australia
Leila Peggs - The University of Western Australia
Michelle Siekierka - The University of Western Australia

We conduct a clinical study of the investment behavior of 115 subjects. Using Norman's Big 5, Preference for Innovation and Risk-Taking Propensity (from Jackson's Personality Inventory), and Bem's sex-role inventory, we confirm the argument presented in Durand, Newby, and Sanghani [2008] that personality is related to investment choices and outcomes. We extend Durand et al. by demonstrating that investors’ reliance on two heuristics used to model market movements—the availability heuristic and the disposition effect—are associated with their personality traits.

Institutional Reinvestments in Private Equity Funds as a Double-Edged Sword: The Role of the Status Quo Bias
Markus Freiburg - WHU–Otto Beisheim School of Management
Dietmar Grichnik - University of St. Gallen

Reinvestments can be a rational investment strategy for institutional investors in private equity funds to make use of inside information from previous funds or to get preferred access to restricted funds. However, reinvestments could also be motivated by a status quo bias, which describes a behavioral tendency to pursue the status quo option disproportionately often. This paper investigates the role of the status quo bias for institutional investments in private equity funds. Based on our fieldwork and a unique data set of 136 institutional investors and private equity firms in Germany, we show that institutional investors strongly prefer private equity firms in which they have invested before. The magnitude of the status quo bias depends on the nature of the investment opportunity and certain investor characteristics. Our results suggest that reinvestments are a double-edged sword for institutional investors that can result from a rational investment strategy, but also from an irrational investment behavior.

Latin Hypercube Sampling and the Identification of the Foreclosure Contagion Threshold
Marshall Gangel - Old Dominion University
Michael J. Seiler - The College of William and Mary
Andrew J. Collins - Old Dominion University

This study examines whether investments based on herd behavior can outperform the market. It utilizes an investment exposure rating system calculated as the percentage of “clicks” on a specific stock banner on a popular business portal. Comparing the returns of a portfolio that consisted of the ten most “clicked” stocks to the returns of the stocks on the Tel Aviv 100 index (TA100) showed that the clicked portfolio did not outperform the index during the examined period. Moreover, a high exposure rating was negatively correlated with returns and positively correlated with higher risk. These results strengthen the hypothesis that investment based on herd behavior is not a winning strategy.


Volume 14, Number 3, 2013 Abstracts
© Copyright Taylor & Francis, LLC. 2013

The Irrationality Illusion: A New Paradigm for Economics and Behavioral Economics
H. Joel Jeffrey - Northern Illinois University
Anthony O. Putman - Descriptive Psychology Institute

A new conceptual and formal framework for analyzing economic decisions, the homo communitatis paradigm, is introduced. The framework is in the form of seven principles, which collectively articulate the entire range of factors that affect choice, including all aspects of individual behavior and of the social context—the communities—the actor is a member of. Traditional economic analysis is shown to be a special case of homo communitatis analysis in which key variables are omitted. Using the principles, we show that experimental results such as loss aversion, framing effects, mental accounting, and judgment biases are not irrational and that the apparent irrationality is in every case an illusion arising from incomplete specification and control of independent variables elucidated in the principles. Several implications for future work are discussed, including high-fidelity models of socioeconomic systems, significantly more powerful and detailed economics simulations, and adoption of significantly different approach to design of economic experiments, one that takes into account all the variables involved in human choice.

The Role of Product and Brand Perceptions In Stock Investing: Effects On Investment Considerations, Optimism and Confidence
Jaakko Aspara - Aalto University School of Business

Behavioral finance researchers have been increasingly interested in the links between individual investors’ subjective perceptions about companies and their stock investment decisions. This article aims to provide a systematic examination of how investors’ subjective and affective evaluations of companies’ products and brands, in particular, may influence investors’ propensities to consider those companies as investment targets. The author hypothesizes the effects by applying psychological consumer behavior theories and tests the hypotheses with data gathered from 292 individual investors. The results show that the personal relevance that an investor attaches to a particular company's product domain decreases the consideration that the investor gives to alternative investment targets, while investing in that company's stock. The investor's affective evaluation of the company's product brand has a similar effect. Moreover, the results show that an investor's affective evaluation of a company's brand increases his optimism about the financial returns of the company's stock. Finally, the results suggest that contrary to what might be expected, an investor's familiarity with the company's brand does not decrease the consideration that he gives to alternative investment targets, nor is brand familiarity linked to overconfidence about the financial returns of the company's stock.

Value of Analysts’ Consensus Recommendations and Investor Sentiment
Pilar Corredor - Universidad Publica de Navarra
Elena Ferrer - Universidad Publica de Navarra
Rafael Santamaria - Universidad Publica de Navarra

This paper studies the effect of investor sentiment on analysts’ consensus recommendations. Our results show that the optimistic bias of analysts in the issuing of recommendations is affected by investor sentiment: the greater the investor sentiment, the more optimistically biased the analysts’ consensus recommendations. This bias is larger in stocks whose characteristics make them hard to value or to arbitrage. We also show that investor sentiment can help in the design of profitable strategies, particularly when taking the short position in portfolios with high sentiment sensitivity stocks.

Do Investors Herd in Global Stock Markets?
Tao Chen - Open University of Hong Kong

By applying daily returns of 35,328 stocks traded on 69 countries over 10 years, this study makes three main contributions to the literature on herding behavior in global stock markets. First, I extend the earlier studies to the international markets in order to conduct a broader test for the validation of a global phenomenon. Second, I evaluate whether herding behavior is different among developed, emerging, and frontier markets. Third, I employ three measures to capture the herding effect to avoid biases in empirical tests. Evidence shows that the Christie and Huang [1995] linear model fails to detect the presence of herding. However, both the Chang, Cheng, and Khorana [2000] nonlinear model and the Hwang and Salmon [2004] state-space model identify the significant herding effect globally.

Temporal Discounting and Number Representation
Santiago Alonso - Universidad de los Andes

Intertemporal decisions usually involve numbers: subjects decide between rewards, with different delays and probabilities. This paper is a brief overview of findings in the area of number cognition, followed by some theoretical applications of these findings in intertemporal decisions. In particular, the fact that numbers are neither linearly perceived nor processed has interesting consequences in the analysis of decisions that involve numbers. Two conflicting possibilities arise, (1) Intertemporal decisions are not about time but about number comparisons, or (2) intertemporal decisions are indeed about time but with the relevant numbers compressed in their logarithmic form.



Volume 14, Number 4, 2013 Abstracts
© Copyright Taylor & Francis, LLC. 2013

Does Sentiment Matter for Stock Market Returns? Evidence from a Small European Market
Carla Manuela da Assunção Fernandes - Universidade de Aveiro-ISCA
Paulo Miguel Marques Gama Gonçalves - University of Coimbra/ISR-Coimbra
Cristina Ortiz - University of Zaragoza
Elisabete Fátima Simões Vieira - University of Aveiro/GOVCOPP

Using Portuguese stock market returns, at the aggregate and industry levels, over the period 1997–2009, we find that the European Union (EU) Economic Sentiment Indicator (ESI) and Consumer Confidence Index are driven by both rational and irrational factors. Irrational ESI is significantly negatively related to stock returns. Sentiment negatively forecasts aggregate stock market returns, but not all industry index returns. We find no contagious effect of U.S. investor sentiment on Portuguese market returns.

Does Price Influence Assessment of Fundamental Value? Experimental Evidence
Sylvain Marsat - Clermont Université
Benjamin Williams - Clermont Université

Assessing the fundamental value of a firm is a difficult task. Theoretically, the market price is exogenous and should not be used in the estimation. We performed a simple experiment to pinpoint whether price is used in fundamental value calculation. Subjects were given similar information on a firm. In the first/control situation, no price was submitted. In the second situation, the actual price was submitted to them. In the third one, a manipulated, overvalued price was provided. We find that the price provided proves to have a clear impact on the subjects’ estimations. This is consistent with the anchoring-and-adjustment hypothesis of fundamental assessment and has implications for a better understanding of financial bubbles.

Does Presenting Investment Results Asset by Asset Lower Risk Taking?
Santosh Anagol - University of Pennsylvania
Keith Jacks Gamble - DePaul University

We examine how the presentation of investment results affects risk taking using an experiment in which participants view results either asset by asset or aggregated into a portfolio result. Our experiment examines the investment choices of a nationwide sample of 249 participants in a simulation of investing for retirement. Segregating investment results by asset decreases subsequent risk taking. Those presented segregated results lower their equity proportion by 4.21% and their portfolio volatility by 0.88%. Both decreases are 8% of the mean levels of risk taking, 50.59% and 10.85%, respectively. At the beginning of the simulation, we present historical results of the investment options either asset by asset or aggregated into portfolios. Among the small number of participants who spend a significant amount of time studying these historic results, segregating results lowers their equity proportion by 9.81%. Our results are a challenge to fully rational theories of investment choice but are consistent with a combination of three aspects of prospect theory based models: loss aversion, narrow framing of individual-asset results, and diminishing sensitivity to aggregated gains and losses. Our experiment never varies the presentation of investment results across time, thus our results are distinct from the effect of myopic loss aversion.

Seasonal Anomalies in Pension Plans
Laura Andreu - University of Zaragoza
Cristina Ortiz - University of Zaragoza
José Luis Sarto - University of Zaragoza

This paper examines the seasonal patterns of Spanish pension plan returns at quarter and year end. Consistent with existing literature, results indicate that a set of portfolios obtain levels of performance during certain months, especially December, that are significantly different from the rest of the months. However, when the relationship between seasonal patterns and previous performance is analyzed, results suggest that top performers during the year experience a penalization in the performance of December. This finding can be explained for different reasons such as window dressing practices and a negative influence of high investment inflows during this month. Nevertheless, the observed decrease in the volatility level at the end of the year seems to suggest that managers follow their benchmarks more closely when they have to report their portfolio returns.

Editorial Board EOV