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The effect of setting goals and emotions on asset allocation decisions

Author

Listed:
  • James A. Sundali
  • Gregory R. Stone
  • Federico L. Guerrero

Abstract

Purpose - The purpose of this paper is to conduct a controlled experiment to examine the effect of goal setting and affect framed feedback on repeated asset allocation investment decisions. Design/methodology/approach - The design of the experiment is a 2×2 between subject design. Subjects allocated monies among four investments for 20 periods. One manipulation varied whether subjects received performance feedback in the form of a happy or sad face, while another manipulation varied whether subjects set a financial goal for themselves and received goal attainment performance feedback. Findings - The main findings include: subjects initially allocate assets in a manner roughly consistent with their stated preference for risk; prior year asset performance leads subjects to make significant changes in portfolio asset allocation in a manner consistent with beliefs of positive autocorrelation in asset returns; and the addition of happy or sad faces to performance feedback information leads to even greater changes in asset allocation. Originality/value - Using ideas from the theory on the self-regulation of behavior and the role of affect in decision making, the authors develop an original framework to account for the results.

Suggested Citation

  • James A. Sundali & Gregory R. Stone & Federico L. Guerrero, 2012. "The effect of setting goals and emotions on asset allocation decisions," Managerial Finance, Emerald Group Publishing, vol. 38(11), pages 1008-1031, September.
  • Handle: RePEc:eme:mfipps:v:38:y:2012:i:11:p:1008-1031
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    References listed on IDEAS

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    1. Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental tests of the mean-variance model for portfolio selection," Organizational Behavior and Human Decision Processes, Elsevier, vol. 42(3), pages 388-410, December.
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    3. Rachel Croson & James Sundali, 2005. "The Gambler’s Fallacy and the Hot Hand: Empirical Data from Casinos," Journal of Risk and Uncertainty, Springer, vol. 30(3), pages 195-209, May.
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    5. Kuhnen, Camelia M. & Knutson, Brian, 2011. "The Influence of Affect on Beliefs, Preferences, and Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 605-626, June.
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    8. repec:hrv:faseco:30747159 is not listed on IDEAS
    9. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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    11. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
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    1. repec:eee:jebusi:v:95:y:2018:i:c:p:47-58 is not listed on IDEAS

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