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The effects of reference point, knowledge, and risk propensity on the evaluation of financial products

  • Kwon, Kyoung-Nan
  • Lee, Jinkook

Evaluating and choosing a financial product often requires a trade-off between risk and returns on investment, as a riskier product may yield a higher return. We examine the effect of different reference points (i.e., a riskier reference vs. a safer reference) on the evaluation of a financial product when attributes are explicitly traded off during the evaluation. Our findings suggest that a safer reference increases the attractiveness of the focal product under evaluation, while a riskier reference point does not affect that evaluation. The safer reference point appears to facilitate the risk-seeking tendency in financial decision-making. Further, two types of consumer knowledge, namely, objective and subjective, can moderate the effect of the reference point. Subjective knowledge negatively affects attribute-based objective evaluations, promoting instead the use of external reference information. A discrepancy between the two types of knowledge (i.e., over-confidence), in particular, can cause a more biased evaluation.

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Article provided by Elsevier in its journal Journal of Business Research.

Volume (Year): 62 (2009)
Issue (Month): 7 (July)
Pages: 719-725

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Handle: RePEc:eee:jbrese:v:62:y:2009:i:7:p:719-725
Contact details of provider: Web page: http://www.elsevier.com/locate/jbusres

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