Volume 6, Number 1, 2005 Abstracts
Copyright Erlbaum 2005

Editorial Commentary: Corporate Governance: Incentive, Conflict of Interest and Bias
Akin Sayrak-University of Pittsburgh
Laxmikant Shukla-University of Pittsburgh

Individual Investor Preferences: A Segmentation Analysis
Marilyn Clark-Murphy-Edith Cowan University
Geoffrey Soutar-University of Western Australia

As the baby boomers age, individuals are being encouraged to take responsibility for their retirement income. Despite the importance of individual investment decisions, we know very little about what factors influence them. Having identified characteristics that are important to individual investors in shares using a conjoint analysis approach, this study uses cluster analysis and discriminant analysis to look for subgroups with differing attitudes and approaches to investment alternatives. Results suggest that four significant subgroups exist within the investor sample, each with different investment preferences and goals. The results have implications for providers of financial services and for those involved in educating individual investors.

Switching Investments Can Be a Bad Idea When Parrondo's Paradox Applies
Richard Spurgin-Clark University
Maurry Tamarkin-Clark University

Many studies have indicated that a buy-and-hold investment strategy is superior to a trading strategy. This is thought to be true because trading incurs transaction costs that lower net returns compared to a buy-and-hold strategy. We propose a behavioral finance argument to illustrate that merely switching between positive expected return assets can lead to a long-run negative expected return, even when transaction costs are ignored. This counterintuitive result may obtain because of Parrondo's Paradox. We provide a stylized theoretical example that demonstrates how a trader can lose money by trading between assets with positive long-run expected returns. We also present simulation results to support our example. Thus, long-run negative results from trading may not be due entirely to transaction costs. A trading strategy may prove inferior to buy-and-hold for agents simply because of their singular trading patterns, as we outline in the paper.

Numerical Information Format and Investment Decisions: Implications for the Disposition Effect and the Status Quo Bias
Enrico Rubaltelli-University of Modena and Reggio Emilia
Sandro Rubichi-University of Modena and Reggio Emilia
Lucia Savadori-University of Trento
Marcello Tedeschi-University of Modena and Reggio Emilia
Riccardo Ferretti-University of Modena and Reggio Emilia

Investment decisions are very difficult because they involve money and can impact our quality of life. According to the axioms of rationality, different but equivalent information formats should not affect investment strategies. The authors perform two experiments here, and find evidence of a strong absolute magnitude effect on investment decisions. In Experiment 1, participants (students) chose to sell a losing fund more often when returns were expressed as a percentage of variation between the buying value and the actual value (e.g., 24%) than when they were expressed as a monetary difference between the buying price and the actual price (e.g., $0.24). In the context of the experiment, the percentage format decreased the disposition effect significantly. Furthermore, describing the stock returns as ratios (e.g., 1/4) increased the tendency toward the status quo bias. In Experiment 2, the authors showed that the absolute magnitude of the numbers shaped participants' satisfaction with fund returns, and was responsible for the different choices of investment strategies.

Self is Never Neutral: Why Economic Agents Behave Irrationally
Lei Gao-Shantou University
Ulrich Schmidt-Hannover University

Modern economics understands utility from the concept of decision utility inferred from individual choice making. It explains agents' decisions or choices in turn by the paradigm of utility maximizing. From our perspective, however, this is a fatal mistake because economic agents do not always choose what they really want in order to maintain their "self-value." In fact, subjects are never neutral. When agents are not able to obtain something they want, they downplay its desirability in order to get psychological satisfaction. But when they are forced to accept what they do not want, they try to rationalize that they really did want it, again in order to save face. Although such "irrational" behavior may decrease economic utility, it gives agents psychological satisfaction and subjective comfort, thus increasing their immaterial utility. In this sense, agents remain rational when conducting such behaviors, even though they run directly contrary to neoclassical rationality concepts.

Research Elsewhere
Robert A. Olsen-California State University, Chico, and Decision Research

Book Reviews
Robert A. Olsen-California State University, Chico, and Decision Research


Volume 6, Number 2, 2005 Abstracts
Copyright Erlbaum 2005

The Timing Ability of Newly Listed NYSE Firms, 1926-1962
Tim Loughran-University of Notre Dame
Jennifer Marietta-Westberg-Michigan State University

We demonstrate that, from 1926 to 1962, the number of new listings on the New York Stock Exchange has predictive ability for future aggregate market returns. The forecasting power of new listings is evident even after controlling for previously documented market predictors, such as the dividend yield. While firms do not appear to time their own performance, tests investigating aggregate market movements around new listing dates are consistent with forecasting ability of the new listing variable. In particular, we use non-parametric regression methods to determine the functional relationship between one-year post-market returns and new listings. We find a decreasing trend in the expected one-year post-market return as a function of the number of new listings each quarter. Subsequent tests show that mean reversion in market returns does not drive the predictive evidence found here.

Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice, and Investor Experience
Julie R. Agnew-The College of William and Mary
Lisa R. Szykman-The College of William and Mary

This paper examines whether information overload might partially explain why defined contribution plan participants tend to follow the "path of least resistance" (Choi et al. [2002]) In two experiments, we test how three common differences among defined contribution plans (the number of investment choices offered, the similarity of the choices, and the display of the choices) lead to varying degrees of information overload and the probability of opting for the default. Notably, we control for the financial aptitude of each individual. The findings suggest that the success of certain plan features depends strongly on the financial background of the participant. We find that low-knowledge individuals opt for the default allocation more often than high-knowledge individuals (experiment 1: 20% versus 2%). The results emphasize the importance of plan design, especially the selection of plan defaults, and the need to improve the financial literacy of participants.

Limit Order Trading Behavior and Individual Investor Performance
Alexander Anderson-Deutsche Bank
Julia Henker-University of New South Wales
Sian Owen-University of New South Wales

Using highly detailed data from a major Australian online broker, we investigate individual investors' limit order behavior and performance. We examine relative performance categorized by number and size of limit orders placed, and by proportion of orders that execute. We find that individuals who place the most orders and have the highest number of transactions enjoy higher returns than those with the fewest orders and transactions. The best performers have the highest proportion of orders execute and place smaller orders than the worst performers. These findings are robust after controlling for stock characteristics with the Fama and French [1992] factor model.

Framing Effects, Selective Information, and Market Behavior: An Experimental Analysis
Erich Kirchler-University of Vienna
Boris Maciejovsky-Massachusetts Institute of Technology
Martin Weber-University of Mannheim

The results of an asset market experiment, in which sixty-four subjects trade two assets on eight markets in a computerized continuous double auction, indicate that objectively irrelevant information influences trading behavior. We find that positively and negatively framed information leads to a particular trading pattern, but leaves trading prices and volume unaffected. The experiment also provided support for the disposition effect. Participants who experience a gain sell their assets more rapidly than participants who experience a loss, and positively framed subjects generally sell their assets later than negatively framed subjects.

Research Elsewhere
Robert A. Olsen-California State University, Chico, and Decision Research

Book Reviews
Robert A. Olsen-California State University, Chico, and Decision Research


Volume 6, Number 3, 2005 Abstracts
Copyright Erlbaum 2005

Bidding and Overconfidence in Experimental Financial Markets
W. David Allen-University of Alabama in Huntsville
Dorla A. Evans-University of Alabama in Huntsville

Overconfidence is a well-documented phenomenon in psychology. Psychologists define an overconfident individual as one who believes he has more accurate information than he actually does. Recently, behavioral economists have become interested in the implications of trader overconfidence for financial decision-making and the functioning of financial markets. To date, most financial market studies have been analytical in nature. These studies assume that traders are overconfident and model decision-making behavior accordingly. Rather than assuming the presence of overconfidence, we use experimental bidding data to determine the extent to which trader overconfidence exists, and what variables suggested by previous finance and psychology research relate to it. We find approximately 40% of subjects exhibited overconfidence. Variables that distinguish overconfident bidding from risk-averse and risk-neutral bidding include the traditional financial variables that explain bidding (expected value and standard deviation), non-traditional financial variables, and variables relating to the self-attribution bias and feedback. Contrary to what some analysts have suggested, experience did not reduce overconfidence.

The Perception of Control and the Level of Overconfidence: Evidence from Analyst Earnings Estimates and Price Targets
Olaf Stotz-RWTH Aachen University
Rudiger von Nitzsch-RWTH Aachen University

The majority of analysts failed to predict the recent stock market downturn at all, or, if they did, then not to its full extent. Apart from the well-known conflicts of interest, forecasts can be distorted by psychological factors. On average, financial analysts forecast earnings and prices with a positive bias. This study examines why financial analysts are overconfident, i.e., why they overestimate their abilities to forecast earnings and prices. Our empirical findings support the hypothesis that overconfidence intensifies with an increasing perception of control.

Development and Validation of a Model and Measure of Financial Risk-Taking
Niklas Lampenius-Universitat der Bundeswehr in Munich
Michael J. Zickar-Bowling Green University

This study presents a theoretical model and assessment tool that measures individual differences in risk-aversion in financial matters. Unlike other measures of financial risk-taking, this measure assumes no prior technical knowledge of finance. The assessment tool was developed using item response theory as well as classical test theory methods. The measure is tested for predictive validity through various procedures and proves to have those properties. In addition the measure is tested for construct validity using structural equation modeling and allows for the successful classification of individuals in one of four classifications: Non-Investor, Risk Managing Investor, Conservative Investor, and Speculator. We discuss potential applications of this measure.

Social Mood and Financial Economics
John R. Nofsinger-Washington State University

The general level of optimism/pessimism in society is reflected by the emotions of financial decision-makers. Because these emotions are correlated across economic participants, our hypothesis leads to three important outcomes. First, social mood determines the types of decisions made by consumers, investors, and corporate managers alike. Extremes in social mood are characterized by optimistic (pessimistic) aggregate investment and business activity. Second, due to the efficient and emotional nature of stock transactions, the stock market itself is a direct measure or gauge of social mood. Third, since the tone and character of business activity follows, rather than leads, social mood, stock market trends help forecast future financial and economic activity. Specific predictions about stock market levels and trading volume, market volatility, firm expansion, leverage use, and IPO and M&A activity are also given.

Research Elsewhere
Robert A. Olsen-California State University, Chico, and Decision Research

Book Reviews
Robert A. Olsen-California State University, Chico, and Decision Research


Volume 6, Number 4, 2005 Abstracts
Copyright Erlbaum 2005

Risk Aversion and Personality Type
Greg Filbeck-University of Wisconsin-La Crosse
Patricia Hatfield-Bradley University
Philip Horvath-Bradley University

The finance literature supports an increasing role for behavioral aspects of investment decision-making. Among other factors such as demographics, personality type may influence risk tolerance as well. This paper explores the relationship between personality type dimensions of the Myers-Briggs Type Indicator (MBTI) and the moments approach to individual investor risk tolerance inherent in expected utility theory (EUT). Our study uses survey results to relate ex ante EUT tolerance for variance and skew to MBTI measures. Results indicate that personality type does explain individual ex ante EUT risk tolerance. Our results further suggest that the relationship between personality type and individual ex ante EUT risk tolerance is non-linear in form.

Gender Stereotypes in Advisors' Clinical Judgments of Financial Risk Tolerance: Objects in the Mirror Are Closer than They Appear
Michael J. Roszkowski-LaSalle University
John Grable-Kansas State University

A sample of 183 financial advisors and 290 advisory clients was used to determine the degree of correspondence between advisors' subjective clinical judgments about their clients' financial risk tolerance and the clients' actual financial risk tolerance. The correlation between the estimates and the actual measures was 0.41. It was further determined that advisors overestimated the risk tolerance of men and underestimated the risk tolerance of women. This distortion could not be attributed to income or wealth differences between the males and females.

Orientation Toward Finances: Development of a Measurement Scale
Ellen Loix-Vrije Universieit Brussel
Roland Pepermans-Vrije Universieit Brussel
Cindy Mentens-Vrije Universieit Brussel
Maarten Goedee-Vrije Universieit Brussel
Marc Jegers-Vrije Universieit Brussel

The construct of orientation toward finances has been developed to focus on individual behavioral dispositions related to personal financial management activities. Based on input from different literature sources, we sought to operationalize the construct using items referring to behavioral competencies. This measurement scale has further been tested and analyzed, resulting in two subfactors: Financial Information, and Personal Financial Planning. We obtained acceptable reliability and validity results for both factors through various studies. Cross-validity testing and confirmatory analysis further supported the robustness of the final two-factor measurement scale.

A Behavioral Approach To Efficient Portfolio Formation
Yaz Gulnur Muradoglu-City University
Aslihan Altay-Salih-Bilkent University

Muhammet Mercan-Yapi Kredi Yatirim

This paper investigates the portfolio performance of subjective forecasts given in different forms. In constructing the efficient frontier, we base the expectation formation processes on subjective forecasts and human behavior, rather than on past prices. We construct the efficient portfolios first, using point, interval, and probabilistic forecasts. Next, we compare their performance to portfolios constructed using the standard time series data approach. Subjective forecasts are provided by actual portfolio managers who forecast stock prices on a real-time basis. Our first contribution is to show that the portfolio performance of subjective forecasts is superior to those of standard time series modeling. Our second contribution lies in the fact that we use experts as forecasters, professional fund managers with substantive expertise. Our third contribution is that we investigate the expert subjects' forecasts using point, interval, and probabilistic forecasts, which renders our findings robust to the task format.

Research Elsewhere
Robert A. Olsen-Decision Science Research Institute

Book Reviews
Robert A. Olsen-Decision Science Research Institute