Chronic Regulatory Focus and Financial Decision-Making: Asset and Portfolio Allocation

101 Pages·2016·2.45 MB·English

by  Navin Kumar (auth.)

SPRINGER BRIEFS IN FINANCE
Navin Kumar
Chronic
Regulatory Focus
and Financial
Decision-Making
Asset and Portfolio
Allocation
123
SpringerBriefs in Finance
More information about this series at http://www.springer.com/series/10282
Navin Kumar
Chronic Regulatory
Focus and Financial
Decision-Making
Asset and Portfolio Allocation
123
NavinKumar
Queensland University of Technology
Brisbane, QLD
Australia
ISSN 2193-1720 ISSN 2193-1739 (electronic)
SpringerBriefs inFinance
ISBN978-981-287-693-5 ISBN978-981-287-694-2 (eBook)
DOI 10.1007/978-981-287-694-2
LibraryofCongressControlNumber:2015946593
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Preface
Behavioural finance explores the various anomalies that exist within financial
markets, but does not provide insights into the motivations that drive these phe-
nomena. Merely documenting such phenomena is insufficient, and studying the
motivationsbehindthesedecisionswillprovidegreaterunderstandingintohowand
why such occurrences take place. Apsychological theory, regulatory focus theory,
has been applied to gain insight into the motivations that underlie one’s financial
decisions.Regulatoryfocustheoryexplorestherelationshipbetweenthemotivation
of a person and their means of goal pursuit. Regulatory focus refers to how one
approachespleasure,butavoidspain.Therearetworegulatoryfoci,promotionand
prevention.Thepromotionfocusisonhopesandaccomplishments(gains),andthe
preventionfocusisonsafetyandresponsibility(non-losses).Thesefociregulatethe
effects oneisexposedtoduringthedecision-making process,thus determining the
way one achieves a particular goal. There exists a dominant or chronic regulatory
focus and a temporary regulatory focus that can be brought upon by introducing
certain stimuli (priming). Priming is an effect wherein exposure to a particular
stimulusinfluences how one reacts toa later stimulus.Previousresearch involving
regulatoryfocusandfinancialdecision-makinginvolvedprimedstatesofregulatory
focus and established that certain assets are associated with particular regulatory
foci.However,asconsumerstendtomakefinancialdecisionspriortopriming,this
book studies how consumers’ chronic regulatory focus affects financial
decision-making. In this book, financial decision-making was modelled by the
selection of assets and portfolios. Two main hypotheses are thus advanced.
Hypothesis1testswhetherchronicregulatoryfocusaffectsassetselection;whether
chronic promotion and prevention participants select promotion and prevention
assets, respectively. Hypothesis 2 tests whether chronic regulatory focus affects
portfolio selection; whether chronic promotion and prevention participants select
promotion and prevention portfolios, respectively. In addition, gender (Hα), age
(Hβ)andeducation(Hγ)areassociatedwithfinancialdecisions;furtherhypotheses
are advanced to explore whether these are related to asset and portfolio selection
and regulatory focus.
v
vi Preface
Two complementary instruments, the eye tracker and self-report, were used to
explore the hypotheses. The use of two measures is proposed to limit social
desirability bias, especially since the eye tracker is an objective instrument.
Participantswereshowntheassetselections,followedbytheportfolioselectionson
the eye tracker, then were given the same allocation scenarios on the self-report.
Participants who spent a greater proportion of time looking at a particular asset or
portfolio thus indicated their selection/preference on the eye tracker. For the
self-report, participants made their selection in the space provided.
The results indicated that the main hypotheses were not supported. Most par-
ticipants selected the prevention asset on either measure and did not choose port-
foliosinaccordancewiththeirfoci.Overall,chronicregulatoryfocusdoesnotcause
participants to select/prefer assets or portfolios that are associated with their regu-
latory foci. Hα and Hγ were supported indicating that gender and education are
associatedwithregulatoryfocusandassetandportfolioallocation.Resultsindicate
that females are less likely to select a prevention portfolio, but the relationship is
weaker for those with a chronic prevention focus. Those who are chronic
prevention-focused and possess a higher degree are more likely to look at the pre-
ventionportfolioforaproportionatelylongertime.Hβwasunsupported,indicating
that age may notbe related toregulatory focus and financialdecision-making.
It is proposed that the main hypotheses were unsupported as participants were
influenced bytheeffect oftheunfavourable world financialclimate,overriding the
effectoftheirchronicregulatoryfocus.Seminalprimingstudiesarecurrentlyfacing
issuesregardingreplicability,andthisbookpostulatesthateventssuchasfinancial
crises may be causing this effect. The eye-tracker results indicated that while par-
ticipants may look at certain assets or portfolios for a proportionately longer time,
they may not select it on the self-report. The eye tracker is purported to give
insights into the type of information viewed by consumers but does not provide
clear indication of whether this information was used to make an associated
financial decision. The book then provides some avenues for future research.
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.1 Theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.2 Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1.3 Consumer Education . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Structure of Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Behavioural Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1.1 Portfolio Construction . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1.2 Investor Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1.3 Securities Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Regulatory Focus Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.1 Creativity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.2 Coaching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.3 Impression Management and Reputation. . . . . . . . . . . . . 15
2.2.4 Romantic Relationships . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.5 Coping at Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2.6 Information Processing. . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2.7 Decision Making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.3 Finance and Regulatory Focus Theory . . . . . . . . . . . . . . . . . . . 18
3 Theoretical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.1 Statement of Hypotheses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.1.1 Further Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.2 Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.2.1 Assessment of Chronic Regulatory Focus. . . . . . . . . . . . 24
3.2.2 Eye Tracking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.2.3 Financial Literacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
vii
viii Contents
4 Research Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.1 Experimental Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.2 Ethical Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3 Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3.1 Sample Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3.2 Allocation Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.3.3 Statistical Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1 Descriptives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1.1 Demographic Profile . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1.2 Descriptives of Measured Variables. . . . . . . . . . . . . . . . 40
5.2 Validity of Hypotheses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.2.1 Validity of H1: Eye Tracker . . . . . . . . . . . . . . . . . . . . . 42
5.2.2 Validity of H1: Self-report . . . . . . . . . . . . . . . . . . . . . . 43
5.2.3 Validity of H2: Eye Tracker . . . . . . . . . . . . . . . . . . . . . 44
5.2.4 Validity of H2: Self-report . . . . . . . . . . . . . . . . . . . . . . 46
5.2.5 Validity of Main Hypotheses: Summary. . . . . . . . . . . . . 47
5.2.6 Financial Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.3 Further Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.3.1 Validity of Hα . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.3.2 Validity of Hβ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
5.3.3 Validity of Hγ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5.3.4 Validity of Further Hypotheses: Summary . . . . . . . . . . . 55
5.4 Additional Analyses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.4.1 Asset and Portfolio Selection . . . . . . . . . . . . . . . . . . . . 55
5.5 Summary of Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
6 General Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
6.1 Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
6.1.1 Main Hypotheses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
6.1.2 Further Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.2 Eye Tracker Selections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
6.2.1 Decision-Making Process . . . . . . . . . . . . . . . . . . . . . . . 64
6.3 Other Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6.3.1 Chronic Prevention Focus. . . . . . . . . . . . . . . . . . . . . . . 64
6.3.2 Asset and Portfolio Selection . . . . . . . . . . . . . . . . . . . . 65
6.3.3 Distraction Scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.3.4 Ethnicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.3.5 Theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
7.1 Summary of Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
7.2 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Contents ix
7.3 Future Directions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
7.4 Concluding Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79