An innovative study carried out at the University of Haifa examined factors influencing decisions by investment advisors and accountants, finding that irrelevant substance, such as newspaper articles dealing with unrelated risky decisions, affects financial decision making. The results of the study were presented at the APESA 2009 international conference on behavioral economics at the University of Haifa.
The study has shown that a group of investment advisors and accountants who have read a story on successful risk-taking decisions rated a traded stock as more valuable for investment, in comparison to a group who read a story on successful results of risk avoidance. "Priming, the underlying psychological mechanism, is well known in psychology, but to date was not analyzed with regard to financial decision making the way we did," said Dr. Doron Kliger who carried out the study along with his student Dalia Gilad.
The study subjects were divided into two groups. One group was given a story on a person who took risks and consequently made big profits. The second group read a story on someone who refused to take such risks and managed, by doing so, to avoid great losses. Both groups were given the story in the context of testing their memory abilities. After reading the story, the participants were given financial reports of a Nasdaq-traded stock whose name was not revealed. The reports included short financial reports and a graph presenting the stock's past performance. The financial information given to the two groups was identical, the only difference being the stories on risk-taking decisions that preceded it. After reading the stories, the participants were asked questions regarding the traded stock.
Results of the study have shown that the group that read on risk taking that succeeded attributed a higher value to the stock investment than the second group.
"The findings of this research show that risk preferences may be manipulated – while the person making those decisions is unaware of it. An investment advisor who reads reports in the morning news that 'encourage' risk taking, might behave entirely differently, on a professional level, than if reading reports on failed risk taking – even if the reports were unrelated to the question at stake. Psychology describes varying human behavior depending on numerous factors. It should not be assumed that financial decision makers are immune to such influences," Dr. Kliger pointed out.
In another experiment, yielding similar results, the priming information was given as verbal inserts attached to ads that accompanied the financial information (see examples below). In this setup, the treatment group received verbal inserts advocating risk-seeking behavior, while the control group received the same ads, but with neutral verbal inserts. The risk-advocating inserts were, for example, "Do you have the courage, vision, daring, to get to the top?", and "Adventurousness, daring, vision, are the materials success is made of," with the corresponding risk-neutral inserts: "Come to invest with us" and "Coordination and timing is everything."
Priming is a known psychological phenomenon, influencing memory retrieval processes by exposure to different stimuli. Dr. Kliger explains: "Consider, for example, a situation where you have returned home after watching a horror movie. While climbing the stairs, you hear the garden gate creaking. A common fear under such circumstances might be that there is a burglar outside. Hearing the same sound after returning from a tedious workday at the office, if noticing it at all, one would probably interpret it in a banal way – 'Woops, forgot the cat outside again'. In this example, the horror movie is the priming substance, affecting subsequent behavior."
The fact that priming takes a role in decision making manifests the existence of two systems: a rational, cognitive one, and a subconscious, 'gut feeling'," Dr. Kliger added.
These processes play parallel roles in the modern information jungle, as they probably did tens of thousands years ago, Dr. Kliger explains. The much faster, subconscious system takes charge whenever there is a need to make fast decisions, such as deciding whether to attack or to run away when confronted with a wild animal - or whether to buy or sell your investment portfolio when something irregular happens, such as a market crash.