Volume 1, Number 2, 2000 Abstracts
© Copyright Erlbaum 2000

Thought Contagions in the Stock Market
Aaron Lynch

The evolutionary epidemiology of ideas, or thought contagion theory, is introduced and applied to possible examples in the stock market. It is suggested that differences in transmissivity, receptivity, and longevity of belief may contribute numerous irrational influences on the stock market, generating sources of inefficiency. These include a wide variety of mechanisms that may generate both positive and negative market overreactions. The soaring prices of Internet stocks during 1998-1999 are used as an example of how investment ideas correlating with new communication behaviors may affect share prices, and how contagion effects in general can affect the broader market. New avenues of empirical investigation are proposed to test the types of hypotheses presented.

Imagery, Affect, and Financial Judgment
Donald G. MacGregor
Paul Slovic
David Dreman
Michael Berry

Traditional theories of finance posit that the pricing of securities in financial markets should be done according to the quality of their underlying technical fundamentals. However, research on financial markets has tended to indicate that factors other than technical fundamentals are often used by market participants to gauge the value of securities. This phenomenon may be quite prevalent in markets for initial public offerings (IPOs), where securities lack a financial history. The imagery and affect associated with securities can be a powerful basis upon which to judge their worth. Advanced business students in a securities analysis course were asked to evaluate a number of industry groups represented on the New York Stock Exchange in terms of a set of judgmental variables. After providing imagery and affective evaluations for each industry group, the participants judged the likelihood that they would invest in companies associated with each industry. Imagery and affective ratings were highly correlated with one another and with the likelihood of investing. Judgments of performance correlated poorly to moderately with actual market performance as measured by weighted average returns for the industry groups studied. The results suggest that imagery and affect are part of a coherent psychological framework for evaluating classes of securities, but that framework may have low validity for predicting performance.

Catastrophic Risk and Securities Design
David Rode
Baruch Fischhoff
Paul Fischbeck

The anomalies, inefficiencies and difficulties in the market for catastrophic bonds are so pronounced as to lead strongly to the inference that psychological factors have a major impact on the pricing of these bonds, and on the lack of acceptance they have en-countered from investors. In this article, we examine major factors influencing the market for catastrophe bonds. Most of the economic factors involvedÑconsidered either singly or in combinationÑare insufficient to account for the magnitude of the anomalies observed. Decades ago, irregularities in the orbit of the planet Uranus allowed astronomers to deduce the existence of another planet, subsequently named Pluto. Since the economic forces at work in the marketplace cannot satisfactorily explain the situation in the catastrophe-bond marketplace, we infer that the gravitational pull of psychological forces is at work. We discuss eight psychological dynamics that may influence the pricing, mispricing, acceptance or lack of acceptance of catastrophe bonds.

Losses from catastrophic events represent an increasing problem for the property and casualty insurance industry. These losses have significant repercussions not only for insurance firms, but also for governmental policy makers and consumers in the insurance market. In principle, one way to deal with these risks is through securitizing them. Doing so would allow spreading risks of local disasters across global capital markets. However, previous attempts at securitizing insurance risks have, by most accounts, met with minimal success. This paper examines possible barriers to securitization, focusing on behavioral responses to such novel instruments. These barriers include the difficulties of conveying the associated risks, even to investors who are sophisticated about finance. Our analyses will draw on research in behavioral decision making and psychology. They will lead to proposals for empirical research and general strategies for making securities design more consonant with investor behavior.

Risk Behavior of East and West Germans in Handling Personal Finances
Peter Tigges
Axel Riegert
Lothar Jonitz
Johannes Brengelmann
Rolf R. Engel

When "Homo Economicus" stands for rationality of financial decision-making, then this is clearly an ideal state not found in real life. Instead, everyday financial decisions are made by using a number of risk-oriented behaviors, both positive and negative. We investigate the relationships between such personality traits and financial decisions following the theory of Brengelmann. We compare financial risk behavior between East and West German citizens using two kinds of samples. One type of sample is drawn from the general East and West German populations. The other is drawn from the readers of the leading business magazine in East and West Germany. It is assumed that West Germans are more risk-oriented than East Germans and that readers of the business magazine are more risk-oriented than the non-readers. The expectations were confirmed. In the general population, West Germans show higher risk excitement, but also a higher degree of strain than East Germans. East Germans are more likely to strive for property. Beyond that, business magazine readers differ from the average population. They show higher degrees of almost all relevant factors. In this subgroup, East Germans remind one of "Musterschüler" as far as handling finances is concerned: They show greater drive, control, and responsibility in financial matters, but feel less distracted than West Germans. These results may be explained by differences in socialization in the former FRGand GDR, where "capitalistic" and "socialistic" values, respectively, are supposed to have dominated theory and practice over long periods of time.

Beyond Behavioral Finance
Elton G. McGoun
Tatjana Skubic

Throughout its history, finance theory has made certain simplifying assumptions regarding human behavior and concerned itself with whether the implications of these assumptions were true and not with whether the assumptions themselves were. Recently, however, more interest has been shown in experimental investigation of these assumptions, and the resultant behavioral finance has been presented as a significant departure from the current research paradigm. Recent research in cognitive science, however, is finding that the mind can and does work differently than traditional finance assumes, and the differences between the behavioral assumptions of traditional finance and the supposedly more realistic ones of today-s behavioral finance are frequently superficial. Knowledge and knowing are likely to be profoundly different from the forms in which we have incorporated them in our extant models, both traditional and behavioral, and they differ in ways similar to those which, for example, have differentiated corporations from corporate images in marketing. To truly understand what is going on we must go beyond behavioral finance to address these differences.

Thought Contagion and Financial Economics: The Dividend Puzzle as a Case Study
George M. Frankfurter
Elton G. McGoun

In this paper we explore the connection between the theory of thought contagion and the ways of thinking in financial economics. We argue that financial economics became what it is today not by coincidence, or a methodically optimal process in search of some universal truth that is "out there," but by an organized campaign to inhibit thinking. We show that much of financial economic thinking is influenced by the modes in which this thought control takes place. We use the dividend puzzle, one of the great enigmas of modern finance, as a case study to demonstrate the validity of our thesis.