The Effects of Attraction on Investment Decisions

The attraction effect occurs when an inferior item changes a decision-maker's perception of the relationship between other available alternatives, contrary to the expectations of rational decision-making. This study presents the first evidence that this effect, which has appeared persistently in consumer research, can influence investment decisions. The study also finds two distinct patterns of reaction to the inferior item as a sign of "cluster attraction"-a way of spreading investment risk. Evidence of attraction means that the values of important facets of corporate reporting may not be stable across an investor's decisions, but may depend on the items presently available for investment. Results of an experiment conducted with approximately 100 graduate students with investing experience or interest show that the investor's perceived values of reported financial or non-financial performance, quality of earnings, and information source reliability are subject to trade-offs and can be altered by the composition of the decision set, rather than by any intrinsic change in the investment candidate itself. The discussion highlights the implications of these findings for an understanding of how investors regard the qualities of financial reporting.