Doctoral Dissertation Research Improvement: An Expermental Study of Ambiguity Aversion, Advice, and Emotion Among Small-Scale Stockholders in China

New York University, New York NY

Investigators

Abstract

This doctoral dissertation improvement award permits the graduate student to run a series of quasi-field experiments on the stock trading floors in Wuhan in Central China. The investigator plans to record both aggregate daily movements in the stock market and individual self-reports of both daily gains and losses and current emotional states. The investigator will use a portfolio choice experiment to study the relationships between advice, ambiguity aversion, the investors' induced emotions and their investment behavior. The investigator will examine these relationships by studying small-scale stockholders in China because their emotions are naturally induced by day to day fluctuations in the stock market. These investors have spent quite a few years trading stocks and they deal with ambiguous events that may trigger emotional responses on a potentially daily basis. Research on this group is very feasible both in terms of access to a large population of investors that visit the local trading rooms and also in terms of cost. They represent a unique source for experimental data that has not been exploited up to this point. This project examines investor reactions to advice since investment decisions are rarely made in a vacuum. People may consult friends, family and neighbors - individuals that may not be any more informed than the investors themselves. Nevertheless their opinions may be influential. In China, among the roughly 40 million stock investors, most are small-scale individual stock holders who trade stocks by themselves. The potential findings will lead us to a greater understanding of how people actually think and behave in ambiguous situations with emotional arousal. The project explores in what situations investors are more likely to exhibit ambiguity aversion by looking at variations in their emotional states and whether or not they have access to advice. The project also determines if there are heterogeneous responses to ambiguity among emotionally charged agents. We may be able to give some inspiration for new theories. If this study finds that emotions have a systematic effect on an individual's ambiguity aversion, it would suggest that ambiguity aversion should be modeled as state dependent. Expected Broader Impact: Ambiguity aversion has been shown to be useful in explaining anomalies such as the equity premium puzzle and the home country bias. These phenomena may also exist in the Chinese stock markets. Many stocks are traded at prices lower than the value of their underlying assets, and investors tend to invest only in stocks of the companies that they are more familiar to them. This study will provide evidence to help verify these behavioral biases or puzzles in the Chinese stock market. The findings may make clear ways in which China could educate its individual investors. Also as the Chinese financial market gradually opens up, it might also help international investors understand the behavior of Chinese investors. Although these experiments are based on individual investors in China, the investigator hopes to extrapolate their behavior to individual investors elsewhere who have to make important personal decisions in finance. In the United States and around the world, individuals are facing more and more financial decisions. For example, companies are now often including restricted stocks or stock options in their compensation plans. Even more broadly, development economists and policy makers are interested in understanding what may hold back households from making possibly profitable investments.