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Individual investors' decision-making: The ubiquitous influence of promotion and prevention self-regulation

Rongrong Zhou, 2002
Faculty Advisor: Michel Tuan Pham
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Abstract

This dissertation examines the central thesis that individual investors' decisions can be usefully studied from a self-regulation perspective. I investigate the influence of self-regulatory systems known as promotion (which reflects the fundamental human need for advancement and growth) and prevention (which reflects the fundamental need for safety and security) on investment decisions. Specifically, I argue that different financial products differentially trigger promotion versus prevention self-regulation. Some financial products prime implicit goals that are primarily promotion-focused, whereas others prime implicit goals that are primarily prevention-focused. As a result, decisions involving these products are carried out with a distinct promotion or prevention orientation.

I test these predictions in eight studies among approximately 1,800 real-world individual investors. A pilot study provides initial evidence that investors indeed associate different investments with distinct regulatory focuses. This pilot study also relates these differences to various predictors such as income and investment experience. Study 1 shows that when investors are primed with a promotion focus or prevention focus, they are inclined to allocate money to investment accounts and invest in assets more compatible with that particular goal. Study 2 shows that, in decisions involving financial products tagged with a promotion focus, investors show disproportionate concerns for potential gains whereas in decisions involving products tagged with a prevention focus, investors show disproportionate concerns for potential losses. Study 3 shows that investors' sensitivity to past paper gains and paper losses in selling decisions are differentially shaped by promotion and prevention focus. Study 4 and Study 5 test the hypothesis that depending on whether the money one invests with comes from an account tagged with a promotion focus or from one tagged with a prevention focus, investors demonstrate different risk propensities in their investment decisions. Study 6 attempts to disentangle the effects of regulatory focus and risk attitude in financial decision-making. Study 7 is a stock trading simulation designed to examine how regulatory focus affects different aspects of trading behavior. These eight studies are discussed and directions for future research are suggested.

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