Volume 2, Number 2, 2001 Abstracts
© Copyright Erlbaum 2000 & 2001

Training Novice Investors to Become More Expert: The Role of Information Accessing Strategy
Jacob Jacoby
Maureen Morrin
Gita Johar
Zeynep Gürhan
Alfred Küss
David Mazursky

Considerable research has examined how securities information, once accessed, is cognitively processed to arrive at buy, sell or hold decisions. In contrast, this paper ex-amines whether training novice investors to simply apply the information accessing strategies used by better-performing security analysts, prior to actual cognitive processing of the information, would improve their performance. We obtain performance differences by comparing trained subjects who used the recommended strategies with untrained subjects. Notably, these differences emerged even during a significant market downturn during the simulation. Implications of the findings and directions for future research are discussed.

Financial Bubbles: Excess Cash, Momentum, and Incomplete Information
Gunduz Caginalp
David Porter
Vernon Smith

We report on a large number of laboratory market experiments demonstrating that a market bubble can be reduced under the following conditions: 1) a low initial liquidity level, i.e., less total cash than value of total shares, 2) deferred dividends, and 3) a bid—ask book that is open to traders. Conversely, a large bubble arises when the opposite conditions exist.

The first part of the article is comprised of twenty-five experiments with varying levels of total cash endowment per share (liquidity level), payment or deferral of dividends and an open or closed bid—ask book. We find that the liquidity level has a very strong influence on the mean and maximum prices during an experiment (P < 1/10,000). These results suggest that within the framework of the classical bubble experiments (dividends distributed after each period and closed book), each dollar per share of additional cash results in a maximum price that is $1 per share higher. There is also limited statistical support for the theory that deferred dividends (which also lower the cash per share during much of the experiment) and an open book lead to a reduced bubble. The three factors taken together show a striking difference in the median magnitude of the bubble ($7.30 versus $0.22 for the maximum deviation from fundamental value).

Another set of twelve experiments features a single dividend at the end of fifteen trading periods and establishes a 0.8 correlation between price and liquidity during the early periods of the experiments. As a result, calibration of prices and evolution to-ward equilibrium price as a function of liquidity are possible.

Investing in Frankenfirms: Predicting Socially Unacceptable Risks
Baruch Fischhoff
Alain Nadaï
Ilya Fischhoff

When the public decides that a product or production process is socially unacceptable, the share price of the firms involved may suffer. The danger is that, out of distaste, people will refrain from buying the product or the shares. But being able to assess the degree of unacceptability can mean being better able to assess how it will affect a firm's profitability, and being better able to assess the value of a firm. Over the past twenty-five years, many psychological studies have considered predictors of unacceptability for one class of industrial activities: those perceived as producing risks to health, safety, and the environment.

We compare results from several studies of risk perception conducted from 1975—1994 with current consumer boycotts and the screening criteria of socially responsible investment firms–two forms of organized distaste. From both perspectives, high historic ratings on undesirable risk characteristics have predicted current organized aversion. These relationships are discussed in terms of how to make more precise estimates of the direct and indirect effects of social unacceptability on share price. One way is to pay critical attention to the financial disclosures of firms that may have such problems in light of the concurrent state of scientific knowledge. We illustrate these issues with the case of genetically modified organisms.