The Influence of Affect on Beliefs, Preferences, and Financial Decisions

Kuhnen, Camelia M.; Knutson, Brian

doi:10.1017/s0022109011000123

Cited by 348 publications

(201 citation statements)

References 54 publications

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“…In general, as seen in Figure 4, across Active/Passive and Gain/Loss trials, subjects update their priors in such a way that the expressed posterior probabilities that the stock is paying from the good distribution is significantly higher (by 12% on average) than the objective Bayesian posterior for low values of this objective probability, and significantly lower (by 13% on average) than the objective Bayesian posterior for high values of this objective probability, a result which replicates the experimental patterns documented in Kuhnen and Knutson (2011). This relationship between subjective and objective posterior beliefs resembles the relationship between decision weights and objective probabilities postulated by Prospect Theory (e.g., Kahneman and Tversky (1979), Prelec (1998)), but it refers to errors in updating priors, and not to people's tendency to overweight rare events and underweight frequent ones.…”

Section: Probability Estimation Errors Across Domainssupporting

confidence: 67%

Asymmetric Learning from Financial Information

Kuhnen

2011

SSRN Journal

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The goal of this study is to ask whether investors learn differently from gains (positive news) versus losses (negative news), whether learning performance is better or worse when people are actively investing in a security or passively observing the security's payoffs, and whether there are personal characteristics that correlate with learning performance. The experimental evidence documented here indicates that the ability to learn from financial information is on average worse in the loss domain, in particular if the investor has personally experienced the prior outcomes of the financial asset considered. Within-individual, learning from gains versus losses, or during active versus passive involvement, are not perfectly correlated, indicating that there exists heterogeneity across people with respect to the type of financial information or context to which they are the most sensitive. Learning performance is determined by acquired financial expertise as well as by genetic factors related to memory and cognitive control. *

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Section: Probability Estimation Errors Across Domainssupporting

confidence: 67%

Asymmetric Learning from Financial Information

Kuhnen

2011

SSRN Journal

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“…We conjecture that the qualitative expectations are affective evaluations of the market situation, while the numerical estimates draw on more cognitive resources (cp. Kuhnen and Knutson, 2011). We would then expect these evaluations to be predictive for decisions that are made in the same "mode" of thinking.…”

Section: Discussionmentioning

confidence: 99%

Do investors put their money where their mouth is? Stock market expectations and investing behavior

Merkle

Weber

2014

Journal of Banking & Finance

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There is a large gap between what finance models predict for individual investor behavior and what can be observed in their actual behavior. Portfolio theory assumes that investors form expectations about return and risk of securities and select portfolios according to their expectations and risk preferences. As a consequence they should hold broadly diversified portfolios and trade very little. But instead, private investors have been shown to hold underdiversified portfolios, to trade frequently, to take high idiosyncratic risk, and to gamble in the stock market. To understand this striking differences the investment process itself needs greater scrutiny. How do real investors use their beliefs and preferences in investing decisions? We examine this question using a panel survey of self-directed online investors at a UK bank. The survey asks for return expectations, risk expectations, and risk tolerance of these investors in three-month intervals between 2008 and 2010. We combine the survey data with investors' actual trading data and portfolio holdings. We find that investor beliefs have little predictive power for immediate trading behavior. However, portfolio risk levels and changes are systematically related to return and risk expectations. In line with financial theory, risk taking increases with return expectations and decreases with risk expectations.JEL-Classification Codes: D81, G02, G11

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“…In addition, subjects may get conditioned to associate a particular type of stimulus with a particular outcome. Kuhnen and Knutson (2011) also conduct a within-subjects analysis of risk-taking using images as stimuli. Their experiment, unlike ours, features a complex estimation task in which the subjects must infer an unknown payoff probability distribution from the outcomes they observe.…”

Section: Prior Literaturementioning

confidence: 99%