Consumer Biases and Competences in Company Stock Holdings

Consumers may make inefficient investment decisions in holding their own-company stocks because of several biases documented by the literature of behavioral economics, such as company stock bias, home bias, and mere exposure effect. Consumers with high levels of competences may be likely to overcome biases and make effective investment decisions. Using data from the 2004 and 2007 Surveys of Consumer Finances, evidence suggests the existence of the biases and competences, whereas a higher level of consumer competence can partially offset the influence of consumer biases.     

High Stakes Decision Making: Normative,Descriptive and Prescriptive Considerations

This paper reviews the state of the art of research on individual decision-making in high-stakes, low-probability settings. A central theme is that resolving high-stakes decisions optimally poses a formidable challenge not only to naïve decision makers, but also to users of more sophisticated tools, such as decision analysis. Such decisions are difficult to make because precise information about probabilities is not available, and the dynamics of the decision are complex. When faced with such problems, naïve decision-makers fall prey to a wide range of potentially harmful biases, such as failing to recognize a high-stakes problem, ignoring the information about probabilities that does exist, and responding to complexity by accepting the status quo. A proposed agenda for future research focuses on how the process and outcomes of high-stakes decision making might be improved.     

Successful U.S. Entrepreneurs: Identifying Ethical Decision-making and Social Responsibility Behaviors

This two-part study analyzed some of the ethical choices made by founding entrepreneurs during the creation and development of their ventures in order to identify the areas in which founding entrepreneurs must make decisions related to ethics or social responsibility during venture creation and development. Content analysis was used to identify decisions with ethical components and/or implications from in-depth interviews with 10 successful business founders. The research for part one of the study was guided by the following research question: In what areas must entrepreneurs make decisions with ethical and/or social responsibility implications during new venture creation and development? The authors identified four distinct categories of decisions where ethical or social responsibility components exist: (1) individual entrepreneurial values-related decisions, (2) organizational culture/employee well-being decisions, (3) customer satisfaction and quality decisions, and (4) external accountability decisions. In the second part of the study, the decisions identified in part one were analyzed using a framework derived from prior research in ethics. This framework was developed from the work of Kant (1964) who theorized about human morals and Rawls (1971) who developed theories about justice. Part two of the study was guided by the following research questions: Do entrepreneurs have values and ethics similar to those held by society in general? If they don’t, how do their values and ethics differ? The comparison revealed that the ethics and/or values that the entrepreneurs either explicitly or implicitly acknowledged were in fact similar to those of society in general.     

Preparing for promotion pays off

You shouldn't assume that your organization will make any great effort to help you get promoted. It is your responsibility to discover and to meet the expectations of those who make the decisions about promotion.     

Predictable irrationality in managerial accounting: Does knowledge overcome cognitive biases of undergraduate students?

Managerial accounting teaches students to make rational decisions by evaluating sunk costs, incremental costs, and opportunity costs. The behavioral literature suggests that biases and heuristics overcome rational thinking. The authors explore whether learning cost concepts attenuates behavioral biases. They find a statistically significant proportion of students completing a managerial accounting course exhibit predictable irrationality in personal choices. By matching behavioral choices with final exam answers, the authors also find that learning rationality principles in accounting does not reduce predictably irrational choices in other settings. The study findings are robust across three key rational concepts. Overall, the authors cannot reject the hypothesis that behavioral choices are independent of knowledge of the underlying principle of rationality.     

Borrowing Capacity and Financial Decisions of Low‐to‐Moderate Income First‐Time Homebuyers

This study documents the extent to which first‐time homebuyers seeking a mortgage accurately estimate their borrowing capacity and how this is associated with their decisions regarding mortgage debt and the take‐up of a free offer of financial coaching. We find that consumers who underestimate their nonmortgage debt (31.5% of the sample) also take out larger mortgages relative to income. Consumers who underestimate or overestimate their total debt as well as their monthly debt payments are more likely to accept the offer of financial coaching. Moreover, overconfidence in financial matters reduces the take‐up of financial coaching. These biases in perceived financial status appear to be systematically related to behavior among a group of relatively inexperienced consumers. These findings suggest that efforts to extend homeownership may need to include debiasing mechanisms to help less informed consumers accurately assess their current debt levels and ability to make ongoing mortgage payments.     

Quantity of Information and Information Display Type as Predictors of Consumer Choice of Product Brands

Research has shown that consumers like large quantities of product information and believe that it helps them to make better purchase decisions. In light of this finding, it is quite possible that consumers might make brand choice decisions based on the amount of information provided. In cases where brands differ in amount of information, consumers may choose those brands that provide the most information. This article reports the results of exploratory research designed to examine this question as well as the effects of two information display types on brand choice in situations of varying information quantity. The findings revealed evidence to support the hypothesized consumer preference for high-information brands over low-information brands. The magnitude of the effect was also found to differ by type of information display.     

Towards an integrated debiasing framework for consumer financial decisions: A reflection on debiasing research

Consumers are subject to cognitive biases, which impede the rationality of their financial decisions. This is problematic, given the onus on the individual to make investment and savings decisions. Thus, there is an impetus for research to identify mitigation strategies. This qualitative review surveys the debiasing literature to identify the prevalent debiasing approaches and proposes an integrated model towards debiasing. The identified core debiasing strategies (education and training, decision support systems, information aspects, experience, and financial advice) are organized and integrated into a single model using the ‘Antecedents, Decisions, Outcomes’ format developed by Paul and Benito. We also propose an agenda for future debiasing research.     

Moral Disengagement in Processes of Organizational Corruption

This paper explores Albert Bandura's concept of moral disengagement in the context of organizational corruption. First, the construct of moral disengagement is defined and elaborated. Moral disengagement is then hypothesized to play a role in the initiation of corruption by both easing and expediting individual unethical decision-making that advances organizational interests. It is hypothesized to be a factor in the facilitation of organizational corruption through dampening individuals’ awareness of the ethical content of the decisions they make. Finally, it is hypothesized to contribute to the perpetuation of corruption in organizations, because if individuals who have a greater propensity to morally disengage are more likely to make decisions that advance organizational interests regardless of the ethicality of those decisions, they may also be rewarded for those decisions in terms of organizational advancement. Together these studies form an argument that moral disengagement plays an important role in processes of organizational corruption.     

An information processing review of the subjective value of money and prices

This article draws on current and classical psychological theories of consumer behavior to review current findings in the psychology and economics literature on the subjective value of money, using an information processing framework. Consumers subjectively value both prices and money. That is, consumers value an identical economic value as a price or as a sum of money differently depending on their individual characteristics, price presentation characteristics, monetary form characteristics, and the consumer context due to subjectivity in their: Perception (biases in assessing the subjective value of money and prices); Inferences (whether consumers use price information to make other judgments); affect (the feelings and emotions associated with spending and saving); memory (errors and biases in recall of money and prices); and information integration (the manner in which consumers integrate costs and benefits to make decisions of whether, when, how much, and what to spend on).     

Narrow Framing and Retirement Savings Decisions

Theoretical studies suggest narrow framing underlies individuals' saving decisions. When narrow framing is applied to retirement savings decisions, narrow framers tend to make decisions about present consumption without considering future consumption, i.e., saving for consumption in retirement. Time preference for the present and narrow framers' preference to maintain the status quo lead to a decision that is less likely to increase savings for retirement. This study provides empirical evidence that narrow framing bias affects retirement savings decisions. Using a two‐part model, the probit estimation indicates narrow framers anticipated being less willing to increase retirement savings contributions compared to broad framers, and the OLS regression estimates that narrow framers anticipated contributing less than broad framers. Here, narrow framers anticipated being less willing to increase retirement savings (62.6% vs. 71.9%) and contributing less ($70.90 vs. $88.40) than broad framers, thus providing empirical evidence regarding the effects of behavioral biases on financial decisions.     

Managers and their not-so rational decisions

Today's corporate environment requires managers to be excellent decision makers. Their ability to make fast, widely-supported, and effective decisions will, in large part, shape the performance of their firms. In this article, we describe two cognitive systems that influence decision making. System 1 refers to a process that is fast, effortless, and intuitive. System 2 is a slow, controlled, and rule-governed decision-making process. Both are important to a wide variety of managerial decisions, and they interact with each other. There are, however, a number of forces at work that hinder the effectiveness of these processes. For example, we know from prospect theory that managers are unwilling to incur loss, so much so that they often make irrational decisions based on a small probability that they could avoid such loss. Another example, the escalation of commitment, explains why managers may continue to dedicate resources to failed projects. We describe these and other biases, with a view toward helping managers better understand the problems of decision making and improve the effectiveness of their decisions.     

From academic research to marketing practice: Some further thoughts

In this rejoinder, we share some further thoughts that were triggered by the insightful comments of Lehmann and Winer, and address some concerns expressed by them. We argue that our work can be interpreted using two different reference points, leading to an optimistic view or a more pessimistic one. We also advance a number of strategies for those in our field who aspire to influence the decisions that managers actually make.     

Errare humanum est: Financial Literacy in European Consumer Credit Law

Examples of financial mistakes made by consumers lend support to the view that systematic mistakes of consumers exist in the EU credit market and that service providers respond strategically to these by redesigning their products. This paper seeks to determine how existing regulation can be improved to ensure consumer protection. Using insights from behavioural economics, this paper argues that financial literacy??that is, knowledge and understanding of complex financial products and skills to navigate the financial market??as a cornerstone for European financial consumer law is problematic. Current regulation is based primarily on information provision to consumers, which should enable them to make appropriate decisions about the risks and suitability of financial products. Although behavioural economics does not necessarily require legal intervention to take other forms than the introduction of information duties, the type of intervention is dependent on the design and needs of a particular market. The EU consumer credit market, in our view, demands more than the current regulation offers in terms of consumer protection. In particular, behavioural studies reveal that consumers generally do not have a sufficient level of financial literacy in order to enable them to make informed, rational decisions. Moreover, behavioural biases have a distorting influence on consumer decision making. The law as it stands, therefore, seems ill-equipped to offer protection to consumers and to prevent them from rash and bad decision making. Reviewing existing regulation and case law, we propose that in the EU law, the Consumer Credit Directive and the Markets in Financial Instruments Directive require updating in order to offer sufficient protection to vulnerable groups of consumers who, on average, have low levels of financial literacy.     

Cognitive biases,risk perception,and venture formation: How individuals decide to start companies

Despite the high risk involved, thousands of individuals decide to start ventures. Past research, however, has found that entrepreneurs do not have a high-risk propensity, that is, a great willingness to knowingly take risks. This study, therefore, explores how individuals cope with the risks inherent in their decisions, and suggests that entrepreneurs may not perceive the riskiness of starting ventures.The study's findings suggest that risk perceptions may differ because certain types of cognitive biases lead individuals to perceive less risk. Cognitive biases are common types of mental shortcuts used to make judgments. This study examines three cognitive biases that previous research has suggested may lower risk perception. The first, overconfidence, refers to the failure to know the limits of one's knowledge. The second bias tested, the illusion of control, occurs when individuals overemphasize the extent to which their skill can increase performance in situations where chance plays a large part and skill is not necessarily the deciding factor. Because the individuals believe that they can control largely uncontrollable events, they also think they can accurately predict the outcome of the events. Finally, the third bias, the belief in the law of small numbers occurs when an individual uses a limited number of informational inputs (a small sample of information) to draw firm conclusions.This study's sample consisted of 191 students pursuing a Masters of Business Administration. The students' responses to a survey based on a case study regarding a decision to start a venture were examined. The survey included questions about the students' willingness to start the venture, their perception of the venture's riskiness, and the extent to which they exhibited cognitive biases in their decision processes.The study's findings tentatively suggest that individuals start ventures because they do not perceive the risks involved, and not because they knowingly accept high levels of risks. The belief in the law of small numbers lowered an individual's perceptions of a venture's riskiness, suggesting that some individuals draw firm conclusions from small samples. An illusion of control also decreased risk perception, suggesting that individuals starting ventures might not acknowledge that certain tasks, important to the venture's success, are beyond their control.Some argue that biases might be associated with venture failure. If this is the case, the very processes that increase the likelihood of starting a venture may actually decrease performance. Entrepreneurs may choose to minimize their biases by soliciting and paying heed to the advice of outsiders, or by using group decision-making techniques, such as devil's advocacy or dialectical inquiry.Others, however, suggest that early in the decision process, biases may be beneficial because they lower risk perception, which allows entrepreneurs to generate the commitment needed for success. Even if this is true, entrepreneurs should still institute processes to increase learning so the venture can adjust to unfolding realities and avoid any damage caused by initial misperceptions. Similarly, entrepreneurs need adequate safety nets in case their biases lead them to encounter unforeseen difficulties. The potential positive and negative effects of biases and perceiving low levels of risk suggest the importance of exploring this area further.     

Manipulation and Deception as Part of a Phishing Equilibrium

Free markets are products of peace and freedom, flourishing in stable times when people do not live in fear. But they also create an economic equilibrium that is highly suitable for enterprises that manipulate or distort our judgment on competitive markets. Unregulated free markets rarely reward the different kind of heroism, of those who restrain themselves from taking advantage of customers’ psychological or informational weaknesses. People frequently make decisions that are not in their best interest. Such bad decisions make it possible for them to be phished for phools. If we have some weakness or other—some way in which we can be phished for phools for more than the usual profit—in the phishing equilibrium, it will be taken up.     

Making Health Care More Affordable Through Health Insurance Finance Reform

The way that we finance health insurance today is both unfair and inefficient. The tax code subsidizes the most expensive employment-based policies while penalizing those who buy insurance on their own or choose more basic policies. By reforming this system, we can both make health care more affordable for millions of people and get higher-value care for the money that we spend. These reforms should be coupled with policies to ensure that basic private insurance is affordable for everyone, including those with chronic health conditions or low income, and to ensure that patients and physicians have the tools that they need to make well-informed decisions. JEL Classification I11     

Cancel anytime!: How easy cancellation options enhance purchase intentions for services that require long-term commitments

The authors recognize that an uncertain environment associated with prolonged pandemic conditions have made consumers reluctant to make long-term contractual commitments in various retail contexts. Hypothesizing that retailers might offer cancellation options to motivate consumers to undertake long-term commitments, the authors conduct two studies in which cancellation messages accompany ads for an online language course and a gym membership. Findings indicate that retailers can alleviate the pressures associated with long-term commitment decisions and can heighten purchase intentions by providing cancel options for consumers who register for services requiring long-term but not short-term commitments. Perceived goal achievability is identified as an underlying mechanism that mediates the effects.     

War-experienced CEOs and corporate policies: Evidence from the Korean war

We investigate the relationship between traumatic war experiences of chief executive officers (CEOs) and their corporate decisions. Using the Korean war event, we find that CEOs exposed to the war in their earlier lives tend to be conservative in corporate policies. Among the war-experienced CEOs, we also find that those who have witnessed large-scale massacres exhibit more conservative behavior. Moreover, war-experienced CEOs make more conservative decisions during a period of financial crisis or when they have ownership. In summary, our results show that early-life exposure to traumatic experiences significantly induces CEOs to be risk-averse.     

Self-employment of older Americans: do recessions matter?

As high unemployment rates linger following the latest recession, job opportunities can be sparse, especially for older workers. This might prompt older Americans to seek out opportunities in self-employment. Alternatively, recession-related decreases in economic activity might make self-employment less attractive. Using the Health and Retirement Study, we find that unemployed respondents are more likely to enter self-employment and that these decisions are clearly affected by recessions, although the effects differ by recession and gender. Unlike men, women’s self-employment decisions are very sensitive to other sources of household income, and women are less likely to become self-employed the deeper the recession.