Volume 6, Number 1, 2005 Abstracts
© Copyright Erlbaum 2005

Editorial Commentary: Corporate Governance: Incentive, Conflict of Interest and Bias
Akin Sayrak-University of Pittsburgh
Laxmikant Shukla-University of Pittsburgh

Individual Investor Preferences: A Segmentation Analysis
Marilyn Clark-Murphy-Edith Cowan University
Geoffrey Soutar-University of Western Australia

As the baby boomers age, individuals are being encouraged to take responsibility for their retirement income. Despite the importance of individual investment decisions, we know very little about what factors influence them. Having identified characteristics that are important to individual investors in shares using a conjoint analysis approach, this study uses cluster analysis and discriminant analysis to look for subgroups with differing attitudes and approaches to investment alternatives. Results suggest that four significant subgroups exist within the investor sample, each with different investment preferences and goals. The results have implications for providers of financial services and for those involved in educating individual investors.

Switching Investments Can Be a Bad Idea When Parrondo's Paradox Applies
Richard Spurgin-Clark University
Maurry Tamarkin-Clark University

Many studies have indicated that a buy-and-hold investment strategy is superior to a trading strategy. This is thought to be true because trading incurs transaction costs that lower net returns compared to a buy-and-hold strategy. We propose a behavioral finance argument to illustrate that merely switching between positive expected return assets can lead to a long-run negative expected return, even when transaction costs are ignored. This counterintuitive result may obtain because of Parrondo's Paradox. We provide a stylized theoretical example that demonstrates how a trader can lose money by trading between assets with positive long-run expected returns. We also present simulation results to support our example. Thus, long-run negative results from trading may not be due entirely to transaction costs. A trading strategy may prove inferior to buy-and-hold for agents simply because of their singular trading patterns, as we outline in the paper.

Numerical Information Format and Investment Decisions: Implications for the Disposition Effect and the Status Quo Bias
Enrico Rubaltelli-University of Modena and Reggio Emilia
Sandro Rubichi-University of Modena and Reggio Emilia
Lucia Savadori-University of Trento
Marcello Tedeschi-University of Modena and Reggio Emilia
Riccardo Ferretti-University of Modena and Reggio Emilia

Investment decisions are very difficult because they involve money and can impact our quality of life. According to the axioms of rationality, different but equivalent information formats should not affect investment strategies. The authors perform two experiments here, and find evidence of a strong absolute magnitude effect on investment decisions. In Experiment 1, participants (students) chose to sell a losing fund more often when returns were expressed as a percentage of variation between the buying value and the actual value (e.g., 24%) than when they were expressed as a monetary difference between the buying price and the actual price (e.g., $0.24). In the context of the experiment, the percentage format decreased the disposition effect significantly. Furthermore, describing the stock returns as ratios (e.g., 1/4) increased the tendency toward the status quo bias. In Experiment 2, the authors showed that the absolute magnitude of the numbers shaped participants' satisfaction with fund returns, and was responsible for the different choices of investment strategies.

Self is Never Neutral: Why Economic Agents Behave Irrationally
Lei Gao-Shantou University
Ulrich Schmidt-Hannover University

Modern economics understands utility from the concept of decision utility inferred from individual choice making. It explains agents' decisions or choices in turn by the paradigm of utility maximizing. From our perspective, however, this is a fatal mistake because economic agents do not always choose what they really want in order to maintain their "self-value." In fact, subjects are never neutral. When agents are not able to obtain something they want, they downplay its desirability in order to get psychological satisfaction. But when they are forced to accept what they do not want, they try to rationalize that they really did want it, again in order to save face. Although such "irrational" behavior may decrease economic utility, it gives agents psychological satisfaction and subjective comfort, thus increasing their immaterial utility. In this sense, agents remain rational when conducting such behaviors, even though they run directly contrary to neoclassical rationality concepts.

Research Elsewhere
Robert A. Olsen-California State University, Chico, and Decision Research

Book Reviews
Robert A. Olsen-California State University, Chico, and Decision Research