How to adapt to changing markets: experience and personality in a repeated investment game

Investment behavior is traditionally investigated with the assumption that risky investment is on average advantageous. However, this may not always be the case. In this paper, we experimentally studied investment choices made by students and financial professionals under favorable and unfavorable market conditions in a multi-round investment game. In particular, the probability of winning was set so that investment in one condition was advantageous, and in one condition was disadvantageous. To investigate who is more likely to adapt their investment behaviors to the changing market conditions, we also measured personality and self-efficacy. We expected that investment behavior in changing markets could be predicted by a combination of experience (students, professionals), personality (anxiety, optimism, impulsivity, and Openness to Experience), and self-efficacy (belief in one’s ability to make good decisions in an investment task). Results indicate that professionals do not significantly differ from students in their decisions. Personality and self-efficacy both predicted investment behavior. In particular, we found that optimism and anxiety were a liability in unfavorable markets, leading to unreasonable levels of risk. Impulsivity was a liability in both favorable and unfavorable markets, leading to high risk on unfavorable markets, and low risk in favorable markets. Openness to experience was an asset in unfavorable markets, leading to adjusted risk taking. Finally, self-efficacy was generally related to higher levels of risk.risk taking; field experiment; personality; unfavorable conditions; professionals

Psychological and environmental determinants of myopic loss aversion

Each economic actor is characterized by his own evaluations, traits, and strategies. Although heterogeneity of economic actors is widely acknowledged, little is known about the factors causing it. In this paper, we will examine the behavioral bias known as myopic loss aversion, and the environmental and psychological factors leading to different behavioral reactions. Myopic loss aversion has been used to suggest that fund managers should reveal information only rarely, to lead investors to choose options with (on average) higher returns. Specifically, we experimentally studied the impact of experience, individual differences, and emotions on behavioral responses to feedback frequency in an investment setting. Participants made investment decisions in one of three feedback frequency conditions: (1) they received feedback after each round and had the opportunity to make investment changes each time; (2) they received feedback after each round, but were only given the possibility to make changes every three rounds; and (3) they received aggregated feedback every three rounds, and also had the opportunity to make changes every three rounds. We collected information about personality and individual difference factors before the experiment. Finally, evaluations and emotions were measured every three rounds, immediately after feedback was given. We hypothesized that myopic loss aversion is not a general phenomenon, but that stable individual differences lead to different evaluations and emotional reactions concerning feedback. This implies that myopic loss aversion will only be present for some groups of people under certain conditions. As predicted, we found that myopic loss aversion is not generally observed; rather, we found both an experience effect and a personality effect. In particular, myopic loss aversion was particularly likely: (1) when initial investment rounds lead to negative investment experiences (i.e., losses); and (2) for investors with low self-efficacy concerning the investment situation. ‘Self efficacy’ is related to a personality profile characterized by confidence in decision-making abilities, high optimism, and low anxiety. Our results may help explain which individual and situational factors lead to myopic loss aversion, and should help researchers and practitioners provide optimal feedback to different types of investment clients.myopic loss aversion; risk taking; character traits; self efficacy; emotions; personality

Dynamic Choice, Independence and Emotions

From the viewpoint of the independence axiom of expected utility theory, an interesting empirical dynamic choice problem involves the presence of a “global risk”, that is, a chance of losing everything whichever safe or risky option is chosen. In this experimental study, participants have to allocate real money between a safe and a risky project. Treatment variable is the particular decision stage at which a global risk is resolved: (i) before the investment decision; (ii) after the investment decision but before the resolution of the investment risk; (iii) after the resolution of the investment risk. The baseline treatment is without global risk. Our goal is to investigate the isolation effect and the principle of timing independence under the different timing options of the global risk. In addition, we examine the role played by anticipated and experienced emotions in the choice problem. Main findings are a violation of the isolation effect, and support for the principle of timing independence. Although behavior across the different global risk cases shows similarities, we observe clear differences in people’s affective responses. This may be responsible for the conflicting results observed in earlier experiments. Dependent on the timing of the global risk different combinations of anticipated and experienced emotions influence decision making.emotions, investment, global-risk, background risk, laboratory experiment, regret, anxiety

Do Spouses Cooperate? And If Not: Why?

Models of household economics require an understanding of economic interactions in families. Social ties, repetition and reduced strategic uncertainty make social dilemmas in couples a very special case that needs to be empirically studied. In this paper we present results from a large economic experiment with 100 maritally living couples. Participants made decisions in a social dilemma with their partner and with a stranger. We predict behavior in this task with individual and couples' socio-demographic variables, efficiency preferences and couples' marital satisfaction. As opposed to models explaining behavior amongst strangers, the regressions on couples’ decisions highlight clear patterns concerning cooperation behavior which could inspire future household decision-making models.Noncooperative Games; Laboratory, Individual Behavior; Household Production and Intra-household Allocation

Investment, Resolution of Risk, and the Role of Affect

This experimental study is concerned with the impact of the timing of the resolution of risk on people’s willingness to take risks, with a special focus on the role of affect. While the importance of anticipatory emotions has so far been only inferred from decisions regarding hypothetical choice problems, we had participants put their own money at risk in a real investment task. Moreover, emotions were explicitly measured, including anticipatory emotions experienced during the waiting period under delayed resolution (which involved two days). Affective traits and risk attitudes were measured through a web-based questionnaire before the experiment and participants’ preferences for resolution timing, risk, and time were incentive compatibly measured during the experiment. Main findings are that delayed resolution can affect investment, that the effect depends on the risk involved, and that (among all the measures considered) only emotions can explain our results, albeit in ways that are not captured by existing models.investment decision, delayed resolution of risk, emotions, experiment