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
Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management
Paper or plastic?
08.07.2016 | University of Toronto
Ultrafast lasers have introduced new possibilities in engraving ultrafine structures, and scientists are now also investigating how to use them to etch microstructures into thin glass. There are possible applications in analytics (lab on a chip) and especially in electronics and the consumer sector, where great interest has been shown.
This new method was born of a surprising phenomenon: irradiating glass in a particular way with an ultrafast laser has the effect of making the glass up to a...
Terahertz excitation of selected crystal vibrations leads to an effective magnetic field that drives coherent spin motion
Controlling functional properties by light is one of the grand goals in modern condensed matter physics and materials science. A new study now demonstrates how...
Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.
"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...
In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.
A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...
By forcefully embedding two silicon atoms in a diamond matrix, Sandia researchers have demonstrated for the first time on a single chip all the components needed to create a quantum bridge to link quantum computers together.
"People have already built small quantum computers," says Sandia researcher Ryan Camacho. "Maybe the first useful one won't be a single giant quantum computer...
14.10.2016 | Event News
14.10.2016 | Event News
12.10.2016 | Event News
26.10.2016 | Materials Sciences
26.10.2016 | Health and Medicine
26.10.2016 | Physics and Astronomy