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How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?

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Author Info

  • Alok Kumar

    ()
    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • Sonya Seongyeon Lim

    ()
    (Kellstadt Graduate School of Business, DePaul University, Chicago, Illinois 60604)

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    Abstract

    This study examines whether the framing mode (narrow versus broad) influences the stock investment decisions of individual investors. Motivated by the experimental evidence, which suggests that separate decisions are more likely to be narrowly framed than simultaneous decisions, we propose trade clustering as a proxy for narrow framing. Using this framing proxy, we show that investors who execute more clustered trades exhibit weaker disposition effects and hold better-diversified portfolios. We also find that the degree of trade clustering is related to investors' stock preferences and portfolio returns. Collectively, the evidence indicates that the choice of decision frames is likely to be an important determinant of investment decisions.

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    File URL: http://dx.doi.org/10.1287/mnsc.1070.0845
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 54 (2008)
    Issue (Month): 6 (June)
    Pages: 1052-1064

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    Handle: RePEc:inm:ormnsc:v:54:y:2008:i:6:p:1052-1064

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    Related research

    Keywords: narrow framing; trade clustering; disposition effect; portfolio diversification; prospect theory;

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    Cited by:
    1. Bailey, Warren & Kumar, Alok & Ng, David, 2011. "Behavioral biases of mutual fund investors," Journal of Financial Economics, Elsevier, vol. 102(1), pages 1-27, October.
    2. Polman, Evan, 2012. "Self–other decision making and loss aversion," Organizational Behavior and Human Decision Processes, Elsevier, vol. 119(2), pages 141-150.
    3. Da Costa Jr, Newton & Goulart, Marco & Cupertino, Cesar & Macedo Jr, Jurandir & Da Silva, Sergio, 2013. "The disposition effect and investor experience," MPRA Paper 43570, University Library of Munich, Germany.
    4. van der Heijden, Eline & Klein, Tobias J. & Müller, Wieland & Potters, Jan, 2012. "Framing Effects and Impatience: Evidence from a Large Scale Experiment," IZA Discussion Papers 7085, Institute for the Study of Labor (IZA).
    5. Luigi Guiso, 2008. "A Test of Narrow Framing and its Origin," EIEF Working Papers Series 0818, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2008.
    6. Urs Fischbacher & Gerson Hoffmann & Simeon Schudy, 2014. "The causal effect of stop-loss and take-gain orders on the disposition effect," TWI Research Paper Series 89, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    7. Hopfensitz, Astrid, 2009. "Previous outcomes and reference dependence: A meta study of repeated investment tasks with and without restricted feedback," MPRA Paper 16096, University Library of Munich, Germany.
    8. Hopfensitz, Astrid, 2009. "Previous Outcomes and Reference Dependence: A Meta Study of Repeated Investment Tasks with Restricted Feedback," TSE Working Papers 09-087, Toulouse School of Economics (TSE).
    9. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.

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