Doctoral Dissertation Research in DRMS: The Effect of Affective Experience in Investment Decision Making

Boston College, Chestnut Hill MA

Investigators

Abstract

More Americans than ever before - about 125 million - are currently participating in acts of investing. In spite of the growing popularity of investing and of the constant ebbs and flows of emotions in the world of investing, the actual effect of emotion on investment behaviors has not been a major subject of scientific research. The purpose of this project is to explore and examine the role of emotion in investment behaviors. The research focuses on the relationship between affect and two dimensions that can be used to describe investment decision making: defensiveness-aggressiveness and overreaction-underreaction. Specifically, it is predicted that positive feelings may promote aggressive investment decisions, defined as a tendency to focus primarily on obtaining possible gains rather than preventing possible losses in decision making (for example, concentrating investment on a set of high-return assets), whereas negative affective states will foster defensive investment decisions, defined as a tendency to focus primarily on avoiding possible losses rather than obtaining possible gains in decision making (for example, diversifying assets or pursuing low-risk assets). Another prediction is that positive feelings may promote a response pattern of underreaction, defined as a tendency of being relatively insensitive to market signals in making decisions (often failing to respond to meaningful signals), whereas negative affective states may foster a response pattern of over-reaction, defined as a tendency of being overly sensitive to market signals (often responding to meaningless signals). The investigators plan to test these hypotheses in an Internet-based stock investment game combined with an experience-sampling procedure. Thus, the study will investigate the role of affect in decision making in an ecologically valid way. If successful, it will have both theoretical and practical implications. By exploring the critical role of affective experience in decision making process, this research will enrich the decision making literature that has been overly cognitive in nature. It also may help investors enhance their understanding of how, when, and why affective experience influences investment decision making.