Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

“If I’m Scared, So Are You.” Study Reveals How Fear Impacts Stock Market Decisions

08.11.2011
Watching a horror movie can scare you into selling your stocks earlier than you would have otherwise. That’s the frightening evidence shown in a series of studies by Associate Professor Eduardo Andrade, University of California, Berkeley’s Haas School of Business.

Andrade and Chan Jean Lee, a PhD candidate, both in the Haas Marketing Group, are the co-authors of “Fear, Social Projection, and Financial Decision Making,” forthcoming in a special issue on consumers’ financial decision making in the Journal of Marketing Research, November 2011.

The article explains that the scared investor’s early decision to sell stocks happens through “social projection”—people’s tendency to heavily rely on their own current feelings and inclinations when they estimate others’ state of mind and preferences. As a result of social projection, an investor who is scared assumes that other investors are also scared and that their fear will consequently drive the stock price down, prompting the one investor to sell early before the price sinks.

“If I’m scared, I tend to project that you are scared,” Andrade explains. “If I feel like selling, I project that you are also going to sell, and that pushes me to sell earlier rather than later in anticipation of a drop in stock value.”

Lee and Andrade set out to manipulate the participants’ emotions in a way completely unrelated to the stock market. They created two random groups. One group watched clips from horror movies such as “The Sixth Sense” and “The Ring.” The other test group watched documentaries about Benjamin Franklin and Vincent Van Gogh containing material not intended to illicit emotion. After the screenings, researchers told the participants that it was time to move onto another experiment, a stock market simulation.

In the stock market simulation, participants went through 25 rounds in which they had an opportunity to sell a $10 stock (part of their participation fee). The rules of the market stated that prices would decrease if any participant sold his or her stock, and prices would increase if every player held onto their stock. Each simulation involved approximately 26 anonymous participants and therefore, prices could go up or down in any given round.

Selling patterns indicated that the scared players, that is, those who watched the horror movies in the previous task, were more likely to sell early in the game than those who watched the documentary films. Put simply, an incidental induction of fear triggered selling behavior. In order to test for the role of social projection, Lee and Andrade added a few twists. They reasoned that if social projection is a key mechanism during the decision-making process, the impact of fear should be reduced when people are less likely to try to project what others will do.

Consistent with this hypothesis, fear promoted early selling only when participants were told that the value of the stock was peer-generated. When participants were told that the stock value was randomly determined by a computer (where social projection is not a factor), the fearful experienced derived from watching the horror movie had no impact on their decision.

The final study of the article found that early sell-off occurred when the investor was told that others shared in his or her risk attitude. At the same time, when the investor was told that his or her risk attitude was very unique in the market, the resulted tended to reverse.

Andrade says the study suggests that controlling the influence of fear in financial decisions can be profitable. “Generally speaking, those who made more money were those who decided to stay longer in the simulation game.”

Pamela Tom | Newswise Science News
Further information:
http://www.haas.berkeley.edu

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: AchemAsia 2019 will take place in Shanghai

Moving into its fourth decade, AchemAsia is setting out for new horizons: The International Expo and Innovation Forum for Sustainable Chemical Production will take place from 21-23 May 2019 in Shanghai, China. With an updated event profile, the eleventh edition focusses on topics that are especially relevant for the Chinese process industry, putting a strong emphasis on sustainability and innovation.

Founded in 1989 as a spin-off of ACHEMA to cater to the needs of China’s then developing industry, AchemAsia has since grown into a platform where the latest...

Im Focus: First real-time test of Li-Fi utilization for the industrial Internet of Things

The BMBF-funded OWICELLS project was successfully completed with a final presentation at the BMW plant in Munich. The presentation demonstrated a Li-Fi communication with a mobile robot, while the robot carried out usual production processes (welding, moving and testing parts) in a 5x5m² production cell. The robust, optical wireless transmission is based on spatial diversity; in other words, data is sent and received simultaneously by several LEDs and several photodiodes. The system can transmit data at more than 100 Mbit/s and five milliseconds latency.

Modern production technologies in the automobile industry must become more flexible in order to fulfil individual customer requirements.

Im Focus: Sharp images with flexible fibers

An international team of scientists has discovered a new way to transfer image information through multimodal fibers with almost no distortion - even if the fiber is bent. The results of the study, to which scientist from the Leibniz-Institute of Photonic Technology Jena (Leibniz IPHT) contributed, were published on 6thJune in the highly-cited journal Physical Review Letters.

Endoscopes allow doctors to see into a patient’s body like through a keyhole. Typically, the images are transmitted via a bundle of several hundreds of optical...

Im Focus: Photoexcited graphene puzzle solved

A boost for graphene-based light detectors

Light detection and control lies at the heart of many modern device applications, such as smartphone cameras. Using graphene as a light-sensitive material for...

Im Focus: Water is not the same as water

Water molecules exist in two different forms with almost identical physical properties. For the first time, researchers have succeeded in separating the two forms to show that they can exhibit different chemical reactivities. These results were reported by researchers from the University of Basel and their colleagues in Hamburg in the scientific journal Nature Communications.

From a chemical perspective, water is a molecule in which a single oxygen atom is linked to two hydrogen atoms. It is less well known that water exists in two...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Munich conference on asteroid detection, tracking and defense

13.06.2018 | Event News

2nd International Baltic Earth Conference in Denmark: “The Baltic Sea region in Transition”

08.06.2018 | Event News

ISEKI_Food 2018: Conference with Holistic View of Food Production

05.06.2018 | Event News

 
Latest News

Novel method for investigating pore geometry in rocks

18.06.2018 | Earth Sciences

Diamond watch components

18.06.2018 | Process Engineering

New type of photosynthesis discovered

18.06.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>