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
Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik
RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung
What if a sensor sensing a thing could be part of the thing itself? Rice University engineers believe they have a two-dimensional solution to do just that.
Rice engineers led by materials scientists Pulickel Ajayan and Jun Lou have developed a method to make atom-flat sensors that seamlessly integrate with devices...
Scientists at the University of Stuttgart and the Karlsruhe Institute of Technology (KIT) succeed in important further development on the way to quantum Computers.
Quantum computers one day should be able to solve certain computing problems much faster than a classical computer. One of the most promising approaches is...
New Project SNAPSTER: Novel luminescent materials by encapsulating phosphorescent metal clusters with organic liquid crystals
Nowadays energy conversion in lighting and optoelectronic devices requires the use of rare earth oxides.
Scientists have discovered the first synthetic material that becomes thicker - at the molecular level - as it is stretched.
Researchers led by Dr Devesh Mistry from the University of Leeds discovered a new non-porous material that has unique and inherent "auxetic" stretching...
Scientists from the Theory Department of the Max Planck Institute for the Structure and Dynamics of Matter (MPSD) at the Center for Free-Electron Laser Science (CFEL) in Hamburg have shown through theoretical calculations and computer simulations that the force between electrons and lattice distortions in an atomically thin two-dimensional superconductor can be controlled with virtual photons. This could aid the development of new superconductors for energy-saving devices and many other technical applications.
The vacuum is not empty. It may sound like magic to laypeople but it has occupied physicists since the birth of quantum mechanics.
10.12.2018 | Event News
06.12.2018 | Event News
03.12.2018 | Event News
10.12.2018 | Life Sciences
10.12.2018 | Physics and Astronomy
10.12.2018 | Life Sciences