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Prevention focus and prior investment failure in financial decision making

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  • Ewe, Soo Yeong
  • Lee, Christina Kwai Choi
  • Watabe, Motoki

Abstract

This research demonstrates, across four experiments, that investors behave differently when a prior investment is perceived as a failure rather than as a loss. The research shows that individuals consistently prefer a conservative investment option in the condition of failure rather than a loss even though the risky option offers a chance to break even (Study 1 & 2). The same result was obtained even when the risky option offers a higher expected return (i.e. should be selected if the decision makers are rational) than the conservative option (Study 3). The tendency to be more risk-averse in the failure condition is due to the activation of situational prevention focus (Study 4). The research findings highlight the importance of understanding investors’ perceptions of their prior negative investment decision outcomes since risk-seeking behavior and buying behavior could be different when a prior investment is perceived as a failure or as a loss.

Suggested Citation

  • Ewe, Soo Yeong & Lee, Christina Kwai Choi & Watabe, Motoki, 2020. "Prevention focus and prior investment failure in financial decision making," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    • Handle: RePEc:eee:beexfi:v:26:y:2020:i:c:s221463501930293x
    DOI: 10.1016/j.jbef.2020.100321
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    References listed on IDEAS

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    1. Huang, Yu Chuan & Chan, Shu Hui, 2014. "The house money and break-even effects for different types of traders: Evidence from Taiwan futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 1-13.
    2. Soo Yeong Ewe & Ferdinand A. Gul & Christina Kwai Choi Lee & Chia Yen Yang, 2018. "The Role of Regulatory Focus and Information in Investment Choice: Some Evidence Using Visual Cues to Frame Regulatory Focus," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 19(1), pages 89-100, January.
    3. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    4. Ronald Bosman & Frans van Winden, 2001. "Anticipated and Experienced Emotions in an Investment Experiment," Tinbergen Institute Discussion Papers 01-058/1, Tinbergen Institute.
    5. Jiewen Hong & Angela Y. Lee, 2008. "Be Fit and Be Strong: Mastering Self-Regulation through Regulatory Fit," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 34(5), pages 682-695, August.
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    Cited by:

    1. Sengupta, Atri & Deb, Soumya Guha & Mittal, Shashank, 2021. "The underlying motivational process behind portfolio diversification choice decisions of individual investors: An experimental design," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    2. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    3. Ma, Alfred & Shu, Tse-Mei & Chen, Jieyu & Chau, Man Foon, 2024. "Does the investment performance measure matter? A perspective from regulatory focus theory," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).

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