The effects of attraction, repelling, and compromise on investment decisions

Date of Completion

January 2002

Keywords

Business Administration, Accounting|Psychology, Behavioral|Psychology, Experimental

Degree

Ph.D.

Abstract

A series of three experiments served as the framework for an investigation into how the decision-making context influences investment decisions. Participants allocated investments among candidates that varied on reported financial or non-financial performance, quality of earnings, and reliability of the source of information. Results indicated that changes in the relative investments between two given candidates could be predicted by the attributes of a third candidate introduced to the decision set, even when that third candidate was an inferior alternative. These results, which violate axioms of rational decision-making, suggest that the perceived values of the candidates' attributes are subject to trade-offs and can be altered by the composition of the decision set, rather than by any intrinsic change in the candidate itself. ^ Consumer studies have found persistent evidence of two of these phenomena: attraction and compromise. This work extends prior research by demonstrating these effects during sequential decision-making, by expanding the collection of these behaviors to include repelling and cluster attraction, and by finding these phenomena present in an investing context. ^ Results suggest that the items we choose to compare alter the values we use when making comparisons. In particular, the values of such important facets of corporate reporting as quality of earnings and source reliability may not be stable across an individual's decisions but may depend on contextual changes. Discussion includes the implications of these findings both for theoretical models of these phenomena and for our practical views of behaviors involving these areas of financial reporting. ^

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