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

Hopfensitz, Astrid and Wranik, Tanja (2009): How to adapt to changing markets: experience and personality in a repeated investment game.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: risk taking; field experiment; personality; unfavorable conditions; professionals
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C93 - Field Experiments; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance

References

Ameriks, J., T. Wranik and P. Salovey (2009). Emotional intelligence, personality, impulsivity, and investor behavior. CFA Institute Research Foundation Publications.

Bechara, A., H. Damasio, D. Tranel and A. Damasio (1997). Deciding advantageously before knowing the advantageous strategy. Science. 275:1293–1294.

Bellemare, C., M. Krause, S. Kroeger and C. Zhang (2005). Myopic loss aversion: information feedback vs. investment flexibility. Economics Letters. 87(3):319-324.

Brandstaetter, H. (1997). Becoming an entrepreneur -- A question of personality structure? Journal of Economic Psychology. 18(2-3): 157-177.

Burns, P. (1985). Experience in decision making: A comparison of students and businessmen in a simulated progressive auction, in V. L. Smith, ed. Research in Experimental Economics (JAI Press, Greenwich).

Caplin, A., and J. Leahy (2001). Psychological expected utility theory and anticipatory feelings. The Quarterly Journal of Economics, 116(1):55-79.

Carver, C. and M. Scheier (2001). Optimism, pessimism, and self-regulation. In Chang and Edward (eds.). Optimism & pessimism: Implications for theory, research, and practice. Washington: American Psychological Association.

Croson, R. and J. Sundali (2005). The Gambler's Fallacy and the Hot Hand: Empirical Data from Casinos. The Journal of Risk and Uncertainty. 30:195-209.

Gneezy, U. and J. Potters (1997). An experiment on risk taking and evaluation periods. The Quarterly Journal of Economics. 112(2):631-645.

Haigh, M. and J. List, 2005, Do professional traders exhibit myopic loss aversion? An experimental analysis. The Journal of Finance, 60(1):523-534.

Hopfensitz, A. (2009). Previous outcomes and reference dependence: A meta study of repeated investment tasks with and without restricted feedback. MPRA working paper nr. 16096

Hopfensitz, A. and T. Wranik (2008). Psychological and Environmental Determinants of Myopic Loss Aversion. NETSPAR discussion paper. nr. 2008-013

John, O. P. and S. Srivastava (1999). The Big Five Trait Taxonomy: History, Measurement, and Theoretical Perspectives. In L.A. Pervin and O.P. John (eds.), Handbook of Personality: Theory and Research. New York: Guilford Press.

Kahneman, D., and A. Tversky (1979). Prospect theory: An analysis of decision under risk. Econometrica. 47:263-291.

Lo, A.W, D.V. Repin and B. N. Steenbarger (2005). Fear and Greed in Financial Markets: A Clinical Study of Day-Traders. The American Economic Review. 95(2): 352-359.

Lynam, D. R. and J. D. Miller (2004). Personality pathways to impulsive behavior and their relation to deviance: Results from three samples. Journal of Quantitative Criminology, 20: 319-341.

McCrae, R. R. (1987). Creativity, divergent thinking, and Openness to Experience. Journal of Personality and Social Psychology, 52: 1258-1265.

McCrae, R. R. (1996). Social consequences of experiential openness. Psychological Bulletin, 120: 323-337.

Mehra, R. and E. C. Prescott (1985). The equity premium: A puzzle. Journal of Monetary Economics, 15:145-161.

Potters, J. and F. van Winden (2000). Professionals and students in a lobbying experiment: Professional rules of conduct and subject surrogacy. Journal of Economic Behavior & Organization, 43(4): 499-522.

Shiv, B., G. Loewenstein and A. Bechara (2005a). The dark side of emotion in decision-making: When individuals with decreased emotional reactions make more advantageous decisions. Cognitive Brain Research. 23:85-92.

Shiv, B., G. Loewenstein, A. Bechara, H. Damasio and A. Damasio (2005b). Investment Behavior and the Negative Side of Emotions. Psychological Science. 16(6):435-439.

Sjöberg, L. and E. Engelberg (2009). Attitudes to economic risk taking, sensation seeking and values of business students specializing in finance. Journal of Behavioral Finance, 10: 33-43.

Spielberger, C. D. (1972). Anxiety as an emotional state. In Anxiety: Current trends in theory and research, 1. New York: Academic Press.

Thaler, R., A. Tversky, D. Kahneman and A. Schwartz (1997). The effect of myopia and loss aversion on risk taking: An experimental test. The Quarterly Journal of Economics. 112(2):647-661.

Tversky, A. and D. Kahneman (1971). Belief in the law of small numbers. Psychological Bulletin, 76, 105-110.

Whiteside, S. P. and D.R. Lynam (2001). The Five Factor Model and Impulsivity: Using a Structural Model of Personality to Understand Impulsivity. Personality and Individual Differences, 30: 669-689.

Whiteside, S. P., D. R. Lynam, J. D. Miller and S. K. Reynolds (2005). Validation of the UPPS impulsive behavior scale: The four factor model of impulsivity. European Journal of Personality, 19, 559-574.

Wu, G., (1999). Anxiety and Decision Making with Delayed Resolution of Uncertainty, Theory and Decision, 46(2):159-199.

Zangeneh, M., A. Grunfeld and S. Koenig (2008). Individual factors in the development and maintenance of problem gambling. In M. Zangeneh, A. Blaszczynski and E. Turner (eds.). In the pursuit of winning: Problem gambling theory, research and treatment. New York: Springer Science + Business Media.

Zermatten, A., M. van der Linden, M. d’Acremont, F. Jermann, and A. Bechara (2005). Impulsivity and Decision Making. The Journal of Nervous and Mental Disease, 193: 647-650.