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How to adapt to changing markets: experience and personality in a repeated investment game

  • Hopfensitz, Astrid
  • Wranik, Tanja

Investment behavior is traditionally investigated with the assumption that risky investment is on average advantageous. However, this may not always be the case. In this paper, we experimentally studied investment choices made by students and financial professionals under favorable and unfavorable market conditions in a multi-round investment game. In particular, the probability of winning was set so that investment in one condition was advantageous, and in one condition was disadvantageous. To investigate who is more likely to adapt their investment behaviors to the changing market conditions, we also measured personality and self-efficacy. We expected that investment behavior in changing markets could be predicted by a combination of experience (students, professionals), personality (anxiety, optimism, impulsivity, and Openness to Experience), and self-efficacy (belief in one’s ability to make good decisions in an investment task). Results indicate that professionals do not significantly differ from students in their decisions. Personality and self-efficacy both predicted investment behavior. In particular, we found that optimism and anxiety were a liability in unfavorable markets, leading to unreasonable levels of risk. Impulsivity was a liability in both favorable and unfavorable markets, leading to high risk on unfavorable markets, and low risk in favorable markets. Openness to experience was an asset in unfavorable markets, leading to adjusted risk taking. Finally, self-efficacy was generally related to higher levels of risk.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17835.

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Date of creation: 30 Sep 2009
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Handle: RePEc:pra:mprapa:17835
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  1. Caplin, Andrew & Leahy, John, 1997. "Psychological Expected Utility Theory and Anticipatory Feelings," Working Papers 97-37, C.V. Starr Center for Applied Economics, New York University.
  2. Potters, J.J.M. & van Winden, F.A.A.M., 2000. "Professionals and students in a lobbying experiment - Professional rules of conduct and subject surrogacy," Other publications TiSEM 964c6542-3994-4088-a7e6-c, Tilburg University, School of Economics and Management.
  3. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
  4. Andrew W. Lo & Dmitry V. Repin & Brett N. Steenbarger, 2005. "Fear and Greed in Financial Markets: A Clinical Study of Day-Traders," American Economic Review, American Economic Association, vol. 95(2), pages 352-359, May.
  5. John List & Michael Haigh, 2005. "Do professional traders exhibit myopic loss aversion? An experimental analysis," Artefactual Field Experiments 00052, The Field Experiments Website.
  6. Mark Grinblatt & Matti Keloharju, 2006. "Sensation Seeking, Overconfidence, and Trading Activity," NBER Working Papers 12223, National Bureau of Economic Research, Inc.
  7. George Wu, 1999. "Anxiety and Decision Making with Delayed Resolution of Uncertainty," Theory and Decision, Springer, vol. 46(2), pages 159-199, April.
  8. 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.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  10. Astrid Hopfensitz & Frans Winden, 2008. "Dynamic Choice, Independence and Emotions," Theory and Decision, Springer, vol. 64(2), pages 249-300, March.
  11. 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).
  12. repec:ner:tilbur:urn:nbn:nl:ui:12-73908 is not listed on IDEAS
  13. Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-74, June.
  14. repec:dgr:kubcen:200432 is not listed on IDEAS
  15. Hopfensitz, Astrid & Wranik, Tanja, 2008. "Psychological and environmental determinants of myopic loss aversion," MPRA Paper 9305, University Library of Munich, Germany.
  16. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  17. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  18. Brandstatter, Hermann, 1997. "Becoming an entrepreneur -- A question of personality structure?," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 157-177, April.
  19. repec:feb:artefa:0072 is not listed on IDEAS
  20. Thaler, Richard H, et al, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 647-61, May.
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