Sensitivity to Gains and Losses in Financial Decision Making: the Ubiquitous Influence of Promotion Vs. Prevention Goals

ABSTRACT - Individual investors’ financial decisions are largely influenced by pervasive, asset-specific, but mostly implicit goals. Extending Regulatory Focus Theory (Higgins, 1997) to the financial decision making domain, we propose that investors’ relative concern for advancement and growth (promotion focus) versus safety and security (prevention focus) varies systematically across financial instruments. In particular, stock investments prime implicit goals that are primarily promotion-focused (i.e., gain seeking), whereas IRA fund investments prime implicit goals that are primarily prevention-focused (i.e., loss avoidance). These predictions were tested in a large-scale experiment among 198 real-world private investors. Consistent with the predictions, the results show that, in decisions involving stocks, investors show a disproportionate concern for potential gains and a relative disregard for potential losses. In contrast, in decisions involving IRA funds, investors show a disproportionate concern for potential losses and a relative disregard for potential gains.

Citation:

Rongrong Zhou (2001) ,"Sensitivity to Gains and Losses in Financial Decision Making: the Ubiquitous Influence of Promotion Vs. Prevention Goals", in NA - Advances in Consumer Research Volume 28, eds. Mary C. Gilly and Joan Meyers-Levy, Valdosta, GA : Association for Consumer Research, Pages: 15.

Advances in Consumer Research Volume 28, 2001     Page 15

SENSITIVITY TO GAINS AND LOSSES IN FINANCIAL DECISION MAKING: THE UBIQUITOUS INFLUENCE OF PROMOTION VS. PREVENTION GOALS

Rongrong Zhou, Columbia University

ABSTRACT -

Individual investors’ financial decisions are largely influenced by pervasive, asset-specific, but mostly implicit goals. Extending Regulatory Focus Theory (Higgins, 1997) to the financial decision making domain, we propose that investors’ relative concern for advancement and growth (promotion focus) versus safety and security (prevention focus) varies systematically across financial instruments. In particular, stock investments prime implicit goals that are primarily promotion-focused (i.e., gain seeking), whereas IRA fund investments prime implicit goals that are primarily prevention-focused (i.e., loss avoidance). These predictions were tested in a large-scale experiment among 198 real-world private investors. Consistent with the predictions, the results show that, in decisions involving stocks, investors show a disproportionate concern for potential gains and a relative disregard for potential losses. In contrast, in decisions involving IRA funds, investors show a disproportionate concern for potential losses and a relative disregard for potential gains.

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