Volume 3, Number 3, 2003 Abstracts
© Copyright Erlbaum 2002

Analysts' Conflicts-Of-Interest: Some Behavioral Aspects
David Dreman-Dreman Value Management

Market Underreaction and Overreaction of Technology Stocks
Aigbe Akhigbe-University of Akron
Stephen J. Larson-Eastern Illinois University
Jeff Madura-Florida Atlantic University

Several studies have assessed stock market under- or overreaction of stocks and there is some agreement among them. However, there is much disagreement about what constitutes market underreaction or overreaction, and the conditions that cause it. The substantial variation in results among studies may be partially attributed to the types of firms that are contained in any sample. We investigate this premise by focusing on a sample of technology stocks that experienced an extreme change in stock price, along with a corresponding control sample of non-technology stocks that experienced a similar extreme change in stock price on the same day.

Based on the subsequent stock price behavior of each sample, we find a greater degree of overreaction within extreme positive changes in technology stock prices (winners) than in non-technology stock prices. In addition, we find a greater degree of underreaction within extreme negative changes in technology stock prices (losers) than in non-technology stock prices. When considering winners and losers collectively for technology and non-technology firms, it appears the market is overoptimistic when it initially revalues technology stock prices relative to non-technology stock prices.

The degree of under- or overreaction of technology stocks varies within the sample of technology stocks, and is conditioned on firm-specific characteristics. Overall, our results suggest that technology stocks exhibit unique stock price behavior subsequent to an extreme change in price, and that this unique behavior can even vary among technology firms according to firm-specific characteristics.

Expert Judgments: Financial Analysts Versus Weather Forecasters
Tadeusz Tyszka-Centre for Market Psychology of Leon Kozminski Academy
Piotr Zielonka-Centre for Market Psychology of Leon Kozminski Academy

Two groups of experts, financial analysts and weather forecasters, were asked to predict corresponding events (the value of the Warsaw Stock Exchange Index and the average temperature of the next month). When accounting for inaccurate judgments, we find that weather forecasters attach more importance to probability than financial analysts. Although both groups revealed the overconfidence effect, it was significantly higher among financial analysts. These results are discussed from the perspective of learning from experience.

Professional Investors as Naturalistic Decision Makers: Evidence and Market Implications
Robert A. Olsen-Decision Research

This paper is the first to examine investment decision-making from a naturalistic decision perspective. Naturalistic decision procedures tend to be used by experts making decisions in complex, ill-structured, and indeterminate situations. Survey results indicate that investment professionals, like other naturalistic decision-makers, rely heavily on mental imagery, reasoning by analogy, and decision procedures that become more intuitive as complexity increases. Also, they are "satisficers," not optimizers. In other words, their primary aim is to make an acceptable choice; finding the best choice is not necessary. Clinical training is recommended to improve the performance of investment professionals. In particular, investment professionals may benefit from training similar to that given to medical professionals wherein emphasis is placed to extensive repetitive exposure to "real world" decisions complete with plenty of immediate and unambiguous feedback.

On the Evaluation of Options on Lotteries: An Experimental Study
Tal Shavit-Technion - Israel Institute of Technology
Doron Sonsino-Technion - Israel Institute of Technology
Uri Benzion-University of Negev

We present the results of a comparative experimental study of the evaluation of simple lotteries and call/put/insurance options on these lotteries. The main findings and conclusions are:

(a) The observed bidding patterns depend on the type of asset under evaluation. In particular, subject behavior when buying or selling a basic lottery seems much more cautious than their behavior when buying or selling options on that lottery.

(b) The observed bidding patterns also depend on subject positions with respect to the underlying asset. In particular, the bids for buying lotteries and options long are statistically uncorrelated with the bids for selling the same lotteries and options short.

(c) Subjects with extreme risk attitudes are more inclined to violate basic no-arbitrage conditions (like the call-put parity) when bidding for the different lotteries.

We demonstrate that it is difficult to reconcile the experimental evidence with mainstream theories on individual decision and choice (although we find strong support for prospect theory in some parts of the data). We conclude that the evaluation of options on lotteries is context-dependent and subtler than perceived by existing theories.

Covered Call Investing in a Loss Aversion Framework
Karyl B. Leggio-University of Missouri at Kansas City
Donald Lien-University of Texas at San Antonio

In a mean-variance framework, the covered call investment strategy has been seen as an inefficient method of allocating wealth. Covered calls reduce the riskiness of the portfolio and therefore lead to lower portfolio returns. Recent debate has focused on the shortcomings of mean-variance efficiency as an accurate depiction of investor utility. Using alternative utility functions, we find mixed support for the use of the covered call investing strategy. Using loss aversion, however, we reexamine the covered call investment decision and find it significantly enhances investor utility relative to an index portfolio investment strategy. We conclude that loss aversion's more accurate depiction of investor preferences and behavior helps to explain the popularity of the covered call investment strategy.

Research Elsewhere
Robert A. Olsen-Decision Research

Book Reviews
Patric Andersson-Center for Economic Psychology, Stockholm School of Economics
Robert A. Olsen-Decision Research