When faced with sequential information, consumers tend to fall prey to one of two well-known heuristics: the hot (or cold) hand and the gambler's fallacy. The authors relate these two traditionally separate heuristics to differences in accepting (buy) versus rejecting (sell) decisions. They identify trend length as a contextual moderating variable and show an asymmetry between buying and selling frames. When applied to a stock market context, a consistent finding is that consumers prefer to buy past winners and sell past losers even when neither should be preferred. This behavior violates the normative rule of buy low and sell high. (c) 2005 by JOURNAL OF CONSUMER RESEARCH, Inc..

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Losers, Winners, and Biased Trades

Joseph Johnson; Gerard J Tellis; Deborah J MacInnis

Journal of Consumer Research; Sep 2005; 32, 2; ABI/INFORM Global

pg. 324

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

... Gratitude and resentment are a result of actions of others on ourselves or someone else ([1] page 24, last paragraph). The sentiments of gratitude and resentment ([1] pages 23-24, third bullet) can arise as a result of empathy, or ''fellow feeling'' (page 24). With this in mind, we assign a payoff function to each agent, which we denote ...

... Therefore, ⋆ in this many-agent case with aligning interactions, adding payoffs is not a gesture of gratitude in the purely rational case (zero temperature). 15 The behavior from these types of interactions have been observed elsewhere in [24] as the 'hot-hand fallacy' in markets. ...

We take a refreshing new look at boundedly rational quadratic models in economics using some elementary modeling of the principles put forward in the book Humanomics by Vernon L. Smith and Bart J. Wilson. A simple model is introduced built on the fundamental Humanomics principles of gratitude/resentment felt and the corresponding action responses of reward /punishment in the form of higher/lower payoff transfers. There are two timescales: one for strictly self-interested action, as in economic equilibrium, and another governed by feelings of gratitude/resentment. One of three timescale scenarios is investigated: one where gratitude /resentment changes much more slowly than economic equilibrium ("quenched model"). Another model, in which economic equilibrium occurs over a much slower time than gratitude /resentment evolution ("annealed" model) is set up, but not investigated. The quenched model with homogeneous interactions turns out to be a non-frustrated spin-glass model. A two-agent quenched model with heterogeneous aligning (ferromagnetic) interactions is analyzed and yields new insights into the critical quenched probability p (1 - p) that represents the empirical frequency of opportunity for agent i to take action for the benefit (hurt) of other that invokes mutual gratitude (resentment). A critical quenched probability p*i , i = 1; 2, exists for each agent. When p < p*i, agent i will choose action in their self-interest. When p > p*i, agent i will take action sensitive to their interpersonal feelings of gratitude/resentment and thus reward/punish the initiating benefit/hurt. We find that the p*i are greater than one-half, which implies agents are averse to resentful behavior and punishment. This was not built into the model, but is a result of its properties, and consistent with Axiom 4 in Humanomics about the asymmetry of gratitude and resentment. Furthermore, the agent who receives less payoff is more averse to resentful behavior; i.e., has a higher critical quenched probability. For this particular model, the Nash equilibrium has no predictive power of Humanomics properties since the rewards are the same for self-interested behavior, resentful behavior, and gratitude behavior. Accordingly, we see that the boundedly rational Gibbs equilibrium does indeed lead to richer properties.

... Illusory pattern detection has been the cognitive bias under study in a large proportion (27%) of past studies that have investigated the relationship between cognitive bias and risk (Craig, 2016). This cognitive bias has been studied by looking at lottery play in relation to previous lottery draws (e.g., Clotfelter, & Cook, 1993;Suetens & Tyran, 2012;Terrell, 1994), and in investment decisions (e.g., Johnson et al., 2005). It has also been studied by observing participants' predictions during games of chance, such as flipping a coin and roulette (e.g., Ayton & Fischer, 2004;Ball, 2012;Huber et al., 2010). ...

  • Joan C. Craig Joan C. Craig

Development and psychometric evaluation of a holistic measure of risk perception

... However, it does not emphasise consequences for individual utility stemming from the distribution of a good (as it is the case for positional goods), but rather the interdependency of the quality assessment of goods. The feedback effect from prices on the assessment of quality picks up the analysis of bandwagon effects (Leibenstein, 1950) and the hot hand fallacy (Johnson et al., 2005). ...

  • Jens Beckert

This article explores price formation in markets where quality cannot be based on intrinsic characteristics of the good exchanged. In such markets, quality uncertainty is not an information problem as described by Akerlof in the market for lemons model. Instead, defining quality is a problem of contingent assessments that are arrived at intersubjectively through discursive practices and mutual observation of market participants. Quality is endogenous to the market process. Institutions and conventions play an important role, much as they do in the market for lemons model, but their function is to generate confidence rather than trust. Prices emerge in such markets from a combination of intersubjectively established quality assessments, institutions and existing structural characteristics of the market. I call this the markets from meaning model, which I develop based on the art market and expand to capital investments and financial speculation.

... The behavior from these types of interactions have been observed elsewhere in[24] as the 'hot-hand fallacy' in markets. ...

We take a refreshing new look at boundedly rational quadratic models in economics using some elementary modeling of the principles put forward in the book Humanomics by Vernon L. Smith and Bart J. Wilson. A simple model is introduced built on the fundamental Humanomics principles of gratitude/resentment felt and the corresponding action responses of reward/punishment in the form of higher/lower payoff transfers. There are two timescales: one for strictly self-interested action, as in economic equilibrium, and another governed by feelings of gratitude/resentment. One of three timescale scenarios is investigated: one where gratitude/resentment changes much more slowly than economic equilibrium ("quenched model"). Another model, in which economic equilibrium occurs over a much slower time than gratitude/resent evolution ("annealed" model) is set up, but not investigated. The quenched model with homogeneous interactions turns out to be a non-frustrated spin-glass model. A two-agent quenched model with heterogeneous aligning (ferromagnetic) interactions is analyzed and yields new insights into the critical quenched probability p (1 − p) that represents the empirical frequency of opportunity for agent i to take action for the benefit (hurt) of other that invokes mutual gratitude (resentment). A critical quenched probability p*_i , i = 1, 2, exists for each agent. When p < p*_i , agent i will choose action in their self-interest. When p > p*_i , agent i will take action sensitive to their interpersonal feelings of gratitude/resentment and thus reward/punish the initiating benefit/hurt. We find that the p*_i are greater than one-half, which implies agents are averse to resentful behavior and punishment. This was not built into the model, but is a result of its properties, and consistent with Axiom 4 in Humanomics about the asymmetry of gratitude and resentment. Furthermore, the agent who receives less payoff is more averse to resentful behavior; i.e., has a higher critical quenched probability. For this particular model, the Nash equilibrium has no predictive power of Humanomics properties since the rewards are the same for self-interested behavior, resentful behavior, and gratitude behavior. Accordingly, we see that the boundedly rational Gibbs equilibrium does indeed lead to richer properties.

... The gambler's fallacy judgment pattern reliably occurs for a subset of observers making predictions for future events produced by random mechanical devices (for a recent review, see Reimers, Donkin, & Le Pelley, 2018). Interestingly, both the hot hand and gambler's fallacy judgment patterns are frequently observed in people's predictions for financial market processes (Conrad & Kaul, 1998;Forbes, 1995;Johnson, Tellis, & Macinnis, 2005). ...

  • Kariyushi Rao Kariyushi Rao
  • Reid Hastie

We report on six experiments studying participants' predictions of the next outcome in a sequence of binary events. Participants faced one of three mechanisms generating 18 sequences of 8 events: a random mechanical bingo cage, an intentional goal-directed actor, and a financial market. We systematically manipulated participants' beliefs about the base rate probabilities at which different types of outcomes were generated by each mechanism. Participants either faced unknown (ambiguous) base rates, a specified distribution of three equiprobable base rates, or a precise, stationary base rate. Six target sequences ended in streaks of between two and seven identical outcomes. We focused on participants' predictions of the ninth, unobserved outcome in each of these target sequences. Across all generating mechanisms and prior belief conditions, the most common prediction pattern was best described as close-to-rational belief updating, producing an increasingly strong bias toward repetition of streaks. The exception to this generalization was for sequences generated by a random mechanical bingo cage with a precise, stationary base rate of .50. Under these conditions, participants exhibited a bias toward reversal of streaks. This effect was irrational, given our instructions on the nature of the generator. We conclude that the dominant judgment habit when predicting outcomes of sequences of binary events is reasonable belief updating. We review alternate accounts for the anomalous judgments of sequences produced by random mechanical devices with a precise, stationary base rate.

... A very small number of articles in the organizational behavior literature emphasizes that justice trajectories exert unique influence in predicting job attitudes (Hausknecht, Sturman, & Roberson, 2011). These studies were built on the premise that trends inform human decisions (Johnson, Tellis, & MacInnis, 2005;Kahneman & Tversky, 1972). For instance, using agent-based modeling, Park, Sturman, Vanderpool, and Chan (2015) found that changes in justice over time impact leader-member-exchange. ...

  • Meriem Bouazzaoui
  • Hung-Jui Wu
  • Jens Roehrich Jens Roehrich
  • Anthony S. Roath

Organizational justice has made contributions to the inter-organizational literature by highlighting the effects of justice perceptions on behavioral, attitudinal, and organizational outcomes. However, research on justice perceptions remains scattered and falls short of addressing key elements of justice, and how these elements interact in an inter-organizational context. The lack of understanding calls for a comprehensive review and synthesis of extant studies. After a careful initial review of 375 papers from 1995 to 2018, this paper consolidates 79 papers on organizational justice at an inter-organizational level with respect to theoretical perspectives, methodologies, contexts, and research findings. The thematic and descriptive analyses offer deeper insights into the varying effects of different organizational justice dimensions, and bring forward limitations of current research including a focus on a: single side of the dyad, static view of justice, and single level of analysis. Consequently, the synthesis section, derived from the thematic analysis, draws out three fruitful key themes including: i) justice asymmetry; ii) justice dynamics; and iii) multilevel view of justice. The study positions fruitful research questions for each theme, before presenting the study's limitations and implications.

  • Ralph G Kauffman Ralph G Kauffman
  • Lucille Pointer

Purpose This study aims to examine how the widespread adoption of digital technology (DT) in business-to-business (B2B) markets affects and, in particular, increases the velocity of relationship development over time. Design/methodology/approach A literature search was conducted to develop propositions concerning DT's effect on the various stages of an existing B2B buyer-seller relationship development model. A group of 55 experienced practitioners was used to obtain reactions to the propositions. Findings DT affects buyer-seller relationship development by reducing the time needed to initiate and advance through sequential relationship stages. Agility in the decision-making process fosters stronger inter-firm relationships and influences other important attributes of B2B relationships, such as organizational commitment, organizational embeddedness, trust and value creation. Research limitations/implications A broader, more diverse sample of commercial buyers and sellers is required to permit testing the generalizability of the study's findings. Practical implications DT affects the speed and agility of B2B relationship formation regardless of stage. As DT evolves in the age of Industry 4.0, an understanding of the effects of DT will aid managers in assessing ways to leverage its potential and apply appropriate DT strategies throughout the B2B relationship process to capitalize on current and future business opportunities. Firms need to explore the positive and negative effects of the digital revolution on managers within their supply chain networks. Originality/value To the best of the authors' knowledge, this is the first study that specifically addresses DT's impact during the specific stages of the relationship development process.

Purpose The purpose of this paper is to identify whether heuristic and herding biases influence portfolio construction and performance in Greece. The current research determines the situation among investors in Greece, a country with several economic problems for the last decade. Design/methodology/approach A survey has been conducted covering a group of active private investors. The relationship between private investors' behavior and portfolio construction and performance was tested using a multiple regression. Findings The authors find that heuristic variable affects private investor's portfolio construction and performance satisfaction level positively. A robustness test on a second group, consisting of professional investors, reveals that heuristic and herding biases affect investment behavior when constructing a portfolio. Practical implications The authors recommend investors to select professional's investment portfolio tools in constructing investment portfolios and avoid excessive errors, which occur due to heuristic. The awareness and understanding of heuristic and herding could be helpful for professionals and decision-makers in financial institutions by improving their performance resulting in more efficient markets. Originality/value The main contribution of this paper lies in the fact that it is the first study on two major behavioral dimensions that affect the investor's portfolio construction and performance in Greece. The rationale of the current research is that the results are helpful for investors in order to take rational, reliable and profitable decisions.

  • Jade S. DeKinder
  • Ajay Kohli Ajay Kohli

This study introduces the concept of flow signals—patterns of a firm's attributes over time—and contrasts them with point signals discussed in the literature to date. Three properties of flow signals are delineated: displacement, propensity, and reversals. The authors illustrate these properties using a start-up's research-and-development (R&D) spending and voluntary disclosure flows. The authors argue that the flow signal properties affect prospective customers' perceptions of a start-up's current and future product quality, thus influencing their purchase likelihood and, ultimately, the start-up's growth in sales. The findings, obtained from panel data comprised of U.S. venture-backed firms that went public in 2001–2005, suggest that sales growth is positively affected by displacement and propensity of both R&D spending and voluntary disclosures and negatively affected by R&D spending reversals. Furthermore, these effects are stronger for the relatively younger start-ups.

  • Narine Yegoryan Narine Yegoryan

Eine zentrale Aufgabe des Marketings ist es, die Präferenzen von Konsumenten zu verstehen und die Heterogenität dieser aufzudecken. Eine Reihe kritischer Entscheidungen, z.B. bei der Neuproduktentwicklung, der Marktsegmentierung und dem Targeting oder der Preisgestaltung, beruhen auf der genauen Einschätzung der Konsumentenpräferenzen. Die Marketingliteratur hat sich bisher auf die Entwicklung von Modellen und Schätzverfahren konzentriert, die es ermöglichen, die Heterogenität von Konsumentenpräferenzen aufzudecken. Konsumenten unterscheiden sich jedoch auch in der Art und Weise, wie sie Kaufentscheidungen treffen und welche verfügbaren Informationen sie nutzen. Das Ziel dieser Dissertation ist es, unser Verständnis für die Unaufmerksamkeit der Konsumenten gegenüber Produkteigenschaften bezüglich Entscheidungen zu verbessern. Es geht darum, 1) die Verbreitung einer solchen Unaufmerksamkeit in verschiedenen Kontexten zu untersuchen, 2) die Methoden, die ein solches Verhalten explizit berücksichtigen, zu untersuchen und zu erweitern, 3) potenzielle Verzerrungen in Parametern zu verstehen und 4) Implikationen für das Management abzuleiten. Die Ergebnisse aus einer umfassenden Reihe von Anwendungen legen nahe, dass Konsumenten in verschiedenen Kontexten (z.B. Produktkategorien) und Settings (z.B. von hoher oder niedriger Komplexität) eine Menge an verfügbaren Informationen bezüglich Produkteigenschaften ignorieren. Zweitens, Entscheidungsmodelle, die ein solches Verhalten explizit berücksichtigen und zusätzlich weitere Daten wie z.B. Eye-Tracking nutzen, zu einem besseren In- und Out-of-Sample-Fit führen. Drittens führt die Missachtung eines solchen Verhaltens zu Verzerrungen, deren Richtung und Größe von der Art des Merkmals (d.h., ob eine bestimmte Richtung der Präferenzen erwartet werden kann) und dem Anteil der Konsumenten, die dieses Merkmal ignorieren, abhängt. Infolgedessen kann es dazu kommen, dass Manager keine optimalen Preis- und Targeting-Entscheidungen treffen.

Two studies were conducted among professional security analysts to explore their patterns of decision making while managing investment portfolios. In study 1, a computer-based simulation, the analysts' styles differed markedly, with most exhibiting either a momentum or contrarian approach, as indicated by responses to portfolio stock price changes. Study 2 used a verbal protocol procedure and semistructured depth interviews to probe the analysts' thought processes. Momentum and contrarian investors were found to differ on a number of dimensions including price expectations, age, experience, raw performance, risk propensity, cognitive style, knowledge calibration, and strategy adaptivity. Implications and limitations are discussed.

  • Hillel J. Einhorn
  • Robin Hogarth Robin Hogarth

Notes that an accumulating body of research on clinical judgment, decision making, and probability estimation has documented a substantial lack of ability of both experts and nonexperts. However, evidence shows that people have great confidence in their fallible judgment. This article examines how this contradiction can be resolved and, in so doing, discusses the relationship between learning and experience. The basic tasks that are considered involve judgments made for the purpose of choosing between actions. At some later time, outcome feedback is used for evaluating the accuracy of judgment. The manner in which judgments of the contingency between predictions and outcomes are made is discussed and is related to the difficulty people have in searching for disconfirming information to test hypotheses. A model for learning and maintaining confidence in one's own judgment is developed that includes the effects of experience and both the frequency and importance of positive and negative feedback. (78 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)

  • Richard H. Thaler Richard H. Thaler

A new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics. The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of "transaction utility." The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.

Market efficiency, long-term returns, and behavioral finance 1 The comments of Brad Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell, Hersh Shefrin, Robert Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo Welch, and a referee have been helpful. Kenneth French and Jay Ritter get special thanks. 1

  • Eugene F. Fama

Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.

  • Amos Tversky
  • Daniel Kahneman

People have erroneous intuitions about the laws of chance. In particular, they regard a sample randomly drawn from a population as highly representative, that is, similar to the population in all essential characteristics.

A model of investor sentiment 1 We are grateful to the NSF for financial support, and to Oliver Blanchard, Alon Brav, John Campbell (a referee), John Cochrane, Edward Glaeser, J.B. Heaton, Danny Kahneman, David Laibson, Owen Lamont, Drazen Prelec, Jay Ritter (a referee), Ken Singleton, Dick Thaler, an anonymous referee, and the editor, Bill Schwert, for comments. 1

  • Nicholas Barberis
  • Andrei Shleifer Andrei Shleifer
  • Robert W. Vishny

Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.

  • Daniel Kahneman
  • Amos Tversky

This paper explores a heuristic-representativeness-according to which the subjective probability of an event, or a sample, is determined by the degree to which it: (i) is similar in essential characteristics to its parent population; and (ii) reflects the salient features of the process by which it is generated. This heuristic is explicated in a series of empirical examples demonstrating predictable and systematic errors in the evaluation of un- certain events. In particular, since sample size does not represent any property of the population, it is expected to have little or no effect on judgment of likelihood. This prediction is confirmed in studies showing that subjective sampling distributions and posterior probability judgments are determined by the most salient characteristic of the sample (e.g., proportion, mean) without regard to the size of the sample. The present heuristic approach is contrasted with the normative (Bayesian) approach to the analysis of the judgment of uncertainty.

  • Gerald A. Feltham
  • James A. Ohlson

This paper models the relation between a firm's market value and accounting data concerning operating and financial activities. Book value equals market value for financial activities, but they can differ for operating activities. Market value is assumed to equal the net present value of expected future dividends, and is shown, under clean surplus accounting, to also equal book value plus the net present value of expected future abnormal earnings (which equals accounting earnings minus an interest charge on opening book value).

  • James A. Ohlson

The paper develops a simple and parsimonious model that relates earnings and unexpected earnings to market returns. The analysis emphasizes that any model under uncertainty must be consistent with the theory of value, earnings, and dividends under certainty (i.e., Hicksian income theory). An extension of this theory exists such that the model subsumes uncertainty. The Hicksian approach is useful because it embeds key dividend irrelevancy concepts due to Modigliani and Miller (1961), and these can be retained under uncertainty. An interesting empirical proposition can be inferred from the model: earnings, rather than the change in earnings, ought to serve as a premier exploratory variable of returns. This contention is consistent with some recent empirical findings due to Easton and Harris (1991). Résumé. L'auteur élabore un modèle simple et parcimonieux qui relie les bénéfices, et les bénéfices imprévus, aux rendements du marché. L'analyse met en relief le fait que tout modèle en situation d'incertitude doit être conforme á la théorie de la valeur, des bénéfices et des dividendes en situation de certitude (c'est-á-dire la théorie hicksienne des bénéfices). Cette théorie peut être élargie de telle sorte que le modèle tienne compte de l'incertitude. L'utilité de l'approche hicksienne tient au fait qu'elle englobe les concepts clés de non-pertinence relatifs au dividende que l'on attribue á Modigliani et Miller. et que ces concepts peuvent être appliqués en situation d'incertitude. Ce modèle permet de formuler une proposition empirique intéressante: les bénéfices, plutôt que l'évolution des bénéfices, doivent servir de première variable exploratoire des rendements. Cette affirmation est conforme aux résultats empiriques récemment obtenus pas Easton et Harris.