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Fear, Social Projection, and Financial Decision Making

Fear, Social Projection, and Financial Decision Making

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Abstract: The number of individual investors who trade stocks online has significantly increased in recent years. Surprisingly, consumer researchers have paid little attention to how emotions influence individual investors' stock-trading decisions. In a series of three experiments, the authors investigate the impact of incidental fear on the decision to sell in a stock market simulation. The results show that fearful (vs. control) participants sell their stock earlier (Experiments 1–3). This effect, however, is contingent on particular features of the market. Fear leads to early sell-off when partipant believe the value of the stock is peer generated but not when they believe the value of the stock is computer generated (Experiment 2). Early sell-off as a result of incidental fear also occurs when participants believe their risk attitude is common in the market but not when they believe their risk attitude is unique (Experiment 3). Social projection—that is, people's tendency to rely on their current state of mind to estimate other people's actions—explains the phenomenon.
Abstract: The number of individual investors who trade stocks online has significantly increased in recent years. Surprisingly, consumer researchers have paid little attention to how emotions influence individual investors' stock-trading decisions. In a series of three experiments, the authors investigate the impact of incidental fear on the decision to sell in a stock market simulation. The results show that fearful (vs. control) participants sell their stock earlier (Experiments 1–3). This effect, however, is contingent on particular features of the market. Fear leads to early sell-off when partipant believe the value of the stock is peer generated but not when they believe the value of the stock is computer generated (Experiment 2). Early sell-off as a result of incidental fear also occurs when participants believe their risk attitude is common in the market but not when they believe their risk attitude is unique (Experiment 3). Social projection—that is, people's tendency to rely on their current state of mind to estimate other people's actions—explains the phenomenon.

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Published by: Russell Sage Foundation on Jun 07, 2012
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CHAN JEAN LEE and EDUARDO B. ANDRADE
The number of individual investors who trade stocks online has signifi-cantly increased in recent years. Surprisingly, consumer researchers havepaid little attention to how emotions influence individual investors’ stock-trading decisions. In a series of three experiments, the authors investigatethe impact of incidental fear on the decision to sell in a stock market sim-ulation. The results show that fearful (vs. control) participants sell theirstock earlier (Experiments 1–3). This effect, however, is contingent onparticular features of the market. Fear leads to early sell-off when parti-pant believe the value of the stock is peer generated but not when theybelieve the value of the stock is computer generated (Experiment 2). Earlysell-off as a result of incidental fear also occurs when participants believetheir risk attitude is common in the market but not when they believe theirrisk attitude is unique (Experiment 3). Social projection—that is, people’stendency to rely on their current state of mind to estimate other people’sactions—explains the phenomenon.
Keywords 
:
emotion, feeling, fear, social projection, decision making,behavioral finance
Fear,SocialProjection,andFinancialDecisionMaking
In recent years, an increased number of individualinvestors have begun trading stocks online (Barber andOdean 2001; Bogan 2009). What used to be the exclusivework of stock brokers is now the mundane task of millionsof individual consumers around the globe. Even long-terminvestments, such as retirement plans and mutual funds, canbe (re)invested with a few mouse clicks. Surprisingly, con-sumer researchers have paid little attention to how peoplemake financial decisions (Raghubir and Das 2009).Given that individual investors often form market expec-tations to make financial decisions with limited informa-tion and that emotions influence judgment and decisionmaking in general (see Cohen, Pham, and Andrade 2008),it is plausible that feeling states at the time of the deci-
*Chan Jean Lee is a doctoral candidate, Marketing Group, HaasSchool of Business, University of California, Berkeley (e-mail: c_lee@haas.berkeley.edu). Eduardo B. Andrade is Associate Professor of Market-ing, Haas School of Business, University of California, Berkeley (e-mail:eandrade@haas.berkeley.edu). The authors thank Taizan Chan, who devel-oped the software system for running the experiments, and the Xlab atUniversity of California, Berkeley, particularly Rowie Castillo and MihoTanaka, for their support with data collection. This project was spon-sored by the Coleman Fung Risk Management Research Center. YuvalRottenstreich served as associate editor for this article.
sion will influence investors’ preferences. Indeed, the mediafrequently cites investors’ sentiments as a major force inthe stock market (e.g., Richards 2010). Moreover, recentresearch indicates that emotions and financial decision areoften correlated. At the individual level, Lo and Repin(2002) and Lo, Repin, and Steenbarger (2005) demon-strate that emotional reactivity varies significantly as aresult of specific market events, such as price volatilityor intraday breaks. Furthermore, emotionality tends to benegatively correlated with a trader’s performance: Thosewho displayed stronger emotional reactions to gains andlosses displayed worse performances. In naturalistic set-tings, researchers have relied on affect-laden events to testthe impact of incidental emotions on financial decisionmaking. Hirshleifer and Shumway (2003) show that sun-shine was correlated with stock returns. Kamstra, Kramer,and Levi (2001) demonstrate that stock returns were lowerduring the fall and winter, when daylight decreased. Finally,Edmans, Garcia, and Norli (2007) report that the marketdeclined after the target country lost important internationalsports matches (e.g., Soccer World Cup).Although the contribution of these studies to the litera-ture is undeniable (see also Tetlock, Saar-Tsechansky, andMacskassy 2008), they present a few limitations. First, thecorrelational properties of the data limit inferences aboutcausality. Second, the absence of direct measures of emo-tions in the studies that rely on aggregate data makes it
© 2011, American Marketing AssociationISSN: 0022-2437 (print), 1547-7193 (electronic)
S121
 Journal of Marketing Research
Vol. XLVIII (Special Issue 2011), S121–S129
 
S122 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 2011
difficult to assess with confidence whether emotions per seplayed a role in the process and, if so, which emotionalstate represented the main causal link. Third, most of theprevious studies do not systematically investigate poten-tial underlying processes through which a given emotionalexperience might be influencing a particular decision.In this article, therefore, we conducted three laboratoryexperiments in an attempt to better understand the role of emotions on financial decision making. Following the tra-ditional paradigm adopted in the emotion literature, we firstinduced participants’ emotion orthogonally in an ostensiblyunrelated task and then observed their financial behaviorin a subsequent stock market simulation. Because specificemotions trigger specific action tendencies (Frijda 1987),we focus on one particular emotional experience—namely,fear—and one single type of financial decision—that is,when to sell a liquid asset in a stock market simulation.Note that actual online stock trading often involves inexpe-rienced investors making decisions in front of a computer.Therefore, simulated online trading with naive participantsin a behavioral lab does not represent a completely unreal-istic setting.
FEAR AND THE DECISION TO SELL
Anecdotal and theoretical reasons led us to focus theresearch question on the impact of fear on the decision tosell. A Google search for “fear” plus “stock market” high-lights a strong association between these two constructs.In June 2011, this search generated more than 33 mil-lion results, at least twice as many as other specific emo-tions, such as sadness, happiness, guilt, or anger. Moreover,fear is often associated with “bearish” behavior (e.g., Shell2010). Beyond anecdotal speculations, however, there arealso theoretical arguments to justify why and how fear mayinfluence selling decisions in the stock market.Negative emotions in general and fear in particular areknown to influence risk perception. In their seminal work,Johnson and Tversky (1983) find that after participants reada newspaper article on human-related traumatic events (e.g.,leukemia, fire, homicide), they gave higher likelihood esti-mates to various negative events, regardless of the similaritybetween the topic of the article and the estimated risk. Theauthors claim that the negative emotional reaction to thenewspaper influenced people’s general risk estimates. Underthe appraisal tendency framework, subsequent research hasargued that people experience fear when they face uncertainand/or uncontrollable threat (Lazarus and Folkman 1984;Lerner and Keltner 2000, 2001; Smith and Ellsworth 1985).As a result, fearful people take cognitive and behavioralactions to minimize uncertainty and the aversive fearfulstate. Indeed, attempts to reduce the uncertainty under inci-dental fear and/or anxiety have been observed, for exam-ple, in people’s reported willingness to choose a safer bet(Raghunathan and Pham 1999) and to take more precau-tionary action in the midst of terrorism threats (Lerner et al.2003). Likewise, fearful people process information morecarefully to reduce uncertainty (Tiedens and Lipton 2001).From an individual investor’s point of view, finan-cial markets represent scenarios of high uncertainty andlow controllability. Moreover, investors are continuouslypresented with the choice between a sure gain/loss andan uncertain outcome. Consider, for example, the stock market. At any point in time, an investor faces the dilemmaof deciding between a certain outcome (i.e., to sell the stock at the present value) and an uncertain one (i.e., not to selland wait for a potential change in stock value in the nextperiod). Because fear leads people to approach certain envi-ronments and avoid uncertain environments, incidentallyscared investors would then, at any given period, be morelikely to choose the certain option (i.e., to sell the stock).Therefore, in a stock market scenario, in which the investordecides at multiple points in time on whether to sell or keepthe stock, fear should accelerate selling behavior.
H
1
: In a stock market simulation, in which the sole decisionis whether to keep (i.e., uncertain outcome) or sell (i.e.,certain outcome) a stock, fearful investors will sell theirstock earlier than nonfearful investors.
THE ROLE OF SOCIAL PROJECTION 
In many financial markets, the value of one’s asset iscontingent on other investors’ decisions. Such contingencyspontaneously leads investors to try to predict what otherswill do, before making their own decision. This type of scenario is prone to social projection biases—that is, peo-ple’s tendency to believe that others are likely to feel, think,and behave like them (Robbins and Krueger 2005; Ross,Greene, and House 1977). Social projection has proved tobe a strong, difficult-to-eradicate, egocentric bias (Kruegerand Clement 1994). Thus, it is likely to be prevalent in thefinancial market as well.Furthermore, a person’s feeling states may play an impor-tant role in predicting others’ feelings and preferences. Forexample, Van Boven and Loewenstein (2003) show thatparticipantscurrent level of thirst was positively corre-lated with their prediction of otherslevel of thirst. Ina similar vein, Van Boven, Loewenstein, and Dunning(2005) show that participants’ feelings of embarrassment(or lack thereof) affected their prediction of other partic-ipantspropensity to put themselves in an embarrassingsituation. In short, mounting evidence demonstrates thatpeople rely on their current state of mind to predict theirown future preferences as well as others’ thoughts, feel-ings, and actions (Loewenstein, O’Donoghue, and Rabin2003; Van Boven and Loewenstein 2003). In a stock mar-ket context, this means that investors may rely on their cur-rent emotions when predicting what other investors will do,which in turn will affect their own decision. Specifically,fearful investors are more likely to believe that their actiontendencies (i.e., inclination to sell the stock) are sharedby the other investors, which will lead them to accelerateselling behavior in anticipation of a drop in the value of the stock.If social projection represents an important mechanismthrough which emotion influences financial decision mak-ing, it implies that the characteristics of the target objector person—the market—represent a critical component of the process. As a result, contrary to the notion that affectproduces a
general
impact on risk perception independentof the aspects associated with the target event (Johnson andTversky 1983), we propose that the effects of fear on risk taking should be contingent on whether and, if so, howsocial projection operates. Specifically, in a stock marketenvironment, the perceived (dis)similarity between an indi-vidual and the other investors in the market will moderate
 
Fear, Social Projection, and Financial Decision Making S123
the impact of fear on risk taking. Some evidence suggeststhat properties of the evaluated object can moderate theimpact of specific emotions on risk estimates. For example,DeSteno et al. (2000) find that sadness and anger led todifferent probability estimates of sad and angering events.In this case, however, they focused exclusively on the emo-tional fit between the individual and the event and reliedon affect-as-information to explain the interaction.Along the same lines, social projection implies that notonly the level of uncertainty but also the features of theuncertainty (e.g., the features of the market) may moderatethe role of fear on financial decision making. More pre-cisely, features that make an investor less (vs. more) likelyto project his or her fear-based action tendencies—holdingconstant the initial level of uncertainty—are less likely toinfluence his or her risk-taking decisions. Furthermore, fea-tures that are believed to move in an opposite manner rela-tive to oneself may even produce contrasting effects on risk taking (i.e., make a scared investor more of a risk taker).In Experiments 2 and 3, we manipulate the features of the market simulation across conditions to address thesepossibilities. In Experiment 2, we take the extreme case tomitigate social projection such that the value of the stock iseither peer generated (everybody’s decision in the room) orcomputer generated. Because people are unlikely to believethat a computer will share their emotions and action tenden-cies, we expect the computer condition to mitigate socialprojection and thus reduce the impact of incidental fear onthe decision to sell. It is worth noting that this approachhas been successfully used to confirm that an observedeffect is not simply a risk-taking/averse reaction. For exam-ple, Kosfeld et al. (2005) show that oxytocin increased theamount of money sent to the trustee in the trust game, butonly when the trustee was another person. The impact of oxytocin disappeared when the trustee was a computer. Fol-lowing a similar approach and rationale, we hypothesizethat fear will not lead to a general risk-averse decision.
H
2
: When participants are told that the other participants inthe market determine the value of the stock, fearful (vs.control) participants will sell their stock earlier. When par-ticipants are told that a computer determines the value of the stock, the impact of incidental fear on selling behaviorwill not occur.
To assess the impact of social projection on judgment anddecision making, researchers have traditionally manipulatedparticipantsperceptions of trait (dis)similarity betweenthemselves and others: “Typically, participants complete apsychometric task and then receive feedback regarding theirgroup membership” (Robbins and Krueger 2005, p. 33). Thebenefit of this type of manipulation is that experimenterscan vary a trait of interest (e.g., others’ risk attitudes) whileholding constant other traits and aspects of the target object.In Experiment 3, through an ostensible risk attitude survey,we lead participants to believe that their own risk attitude is
either 
very common
or 
very unique among the players in theroom. Within this scenario, we hypothesize the following:
H
3
: When led to believe that their risk attitude is commonin the market, fearful (vs. control) participants will selltheir stock earlier. When participants are led to believethat their risk attitude is unique in the market, the impactof incidental fear on early selling behavior will not occuror even reverse.
The reversal would be possible in case participants usedthe “unique risk attitude” information to infer that otherswould be inclined to do the exact opposite of what theywanted to do (e.g., “If I feel like selling, it means thatothers will probably not sell. So, I’ll stay.”).Across all three experiments, we use video exposure tomanipulate incidental fear. In the fear condition, the con-tents of horror videos vary across the experiments to ensurethat a particular content of one particular fear-inducingvideo is not responsible for the effects. In the control con-dition, the videos across the experiments vary not only bycontent but also by intensity (i.e., arousal). Both video con-ditions were run in every experimental session. As part of a “movie preference” cover story, participants were explic-itly told that they would be randomly assigned to differentmovie genres, and two genres (i.e., horror and control) wereactually played across participants within a session.
 EXPERIMENT 1
The goal of this experiment is to test the intuition thatfear leads to selling in the stock market context (H
1
). Afterthe emotion manipulation, participants played a stock mar-ket simulation. Of their $15 participation fee, $10 was con-verted into a stock. Participants’ main task was to decideon when to sell the stock.
 Method Sample and design.
Eighty students participated in theexperiment in exchange for an expected $15 participationfee. The experiment employed a two-level (emotion: fearvs. neutral) single-factor between-subjects design. Threeexperimental sessions were conducted with 26, 27, and 27participants, respectively.
Procedure.
Participants came to the lab and wereassigned to one of the cubicles equipped with a laptopcomputer and a headset. They were then introduced toostensibly two independent studies: “Study 1: Video Eval-uation Taskand “Study 2: Financial Decision-MakingTask.” They were told that given the short length of timefor each study, both would be conducted in the same ses-sion (a common practice in this lab). The entire sessionlasted approximately 40 minutes.
 Emotion manipulation.
Video exposure is a widely usedand relatively effective incidental emotion manipulation(Rottenberg, Ray, and Gross 2007; Westermann et al.1996). Therefore, in Study 1, participants were informedthat the purpose of the study was to investigate people’spreferences for different movie genres. Precisely, they wereprovided with the following information: “You will be pre-sented with a sequence of two video clips from the samegenre. There can be dramas, comedies, sitcoms, actions,documentaries, horror movies, etc. A few general ques-tions will be asked after the videos.” This instruction con-veyed the information that different videos could be pre-sented to different participants. Indeed, both genres wererun in every experiment session. In the control condition,scenes from two documentaries were presented (
 BenjaminFranklin
and
Vincent Van Gogh
), and in the fear condi-tion, participants were exposed to scenes from two horror

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