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Premature infatuation and commitment in individual investing decisions

Author

Listed:
  • Posavac, Steven S.
  • Ratchford, Mark
  • Bollen, Nicolas P.B.
  • Sanbonmatsu, David M.

Abstract

This research documents a premature infatuation effect in financial judgment and choice, and seeks to understand why it occurs. In many financial decisions, one potential investment choice becomes focal. The premature infatuation effect occurs when a focal investment possibility comes to be overvalued simply because it has come to the fore. Three experiments demonstrate that the premature infatuation effect influences financial judgments, choice intentions, and non-hypothetical decisions with financial consequences, and can drive suboptimal decisions. We show that financial expertise does not insulate individuals from this robust tendency. Non-intrusive process tracing methodology demonstrates that the tendency to engage in selective processing underlies the premature infatuation effect. We conclude by discussing how one can avoid falling victim to this bias, and the counterintuitive organizational implication that managers of firms’ retirement plans can leverage premature infatuation to nudge employees to make better choices.

Suggested Citation

  • Posavac, Steven S. & Ratchford, Mark & Bollen, Nicolas P.B. & Sanbonmatsu, David M., 2019. "Premature infatuation and commitment in individual investing decisions," Journal of Economic Psychology, Elsevier, vol. 72(C), pages 245-259.
    • Handle: RePEc:eee:joepsy:v:72:y:2019:i:c:p:245-259
    DOI: 10.1016/j.joep.2019.04.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Investing; Financial choice; Selective processing; Information search;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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