Tendency for people to disregard the counterevidence regarding their financial investments.
The items were adapted from Pompian (2011). Participants are presented with a scenario (e.g., "Suppose you have invested in a security after some careful research. Now, you see a press release that states that the company you’ve invested in may have a problem with its main product line. The second paragraph, however, describes a completely new product that the company might debut later this year") and they are asked to choose between different options, one reflecting the tendency to neglect the counterevidence (e.g., "I will typically take notice of the new product announcement and research that item further").
1. Suppose you have invested in a security after some careful research. Now, you see a press release that states that the company you’ve invested in may have a problem with its main product line. The second paragraph, however, describes a completely new product that the company might debut later this year. What is your natural course of action?
a. I will typically take notice of the new product announcement and research that item further. (1)
b. I will typically take notice of the problem with the company’s product line and research that item further. (0)
2. Suppose you invest in a security after some careful research. The investment appreciates in value but not for the reason you predicted. What is your natural course of action?
a. Since the company did well, I am not concerned. The shares I’ve selected have generated a profit. This confirms that the stock was a good investment. This will make me more confident in my next investment. (1)
b. Although I am pleased, I am concerned about the investment. I will do further research to confirm the logic behind the position. I will be more cautious about my next investment. (0)
3. Suppose you decided to invest in gold. You performed careful research to determine that this investment is a good way to hedge the dollar. Three months after you invest, you realize that the inflation index has not risen, but the investment seems to be doing well. This is not what you expected. How do you react?
a. I will just "go with it." The reason that an investment performs well is not important. What is important is that I make a good investment. (1)
b. I will do research to try and determine why the gold price is doing well. This will help me determine if I should remain invested in gold. (0)
4. Suppose you made an investment but lost money. What is your general reaction?
a. In general, I don’t blame myself too much and can only say that I am not lucky. I will sell it and continue to invest and won’t stop to understand why my investment failed. (1)
b. I will reflect on the reasons for my investment failure, and I am very interested to know why I made a mistake. When I was investing, I set up a lot of assumptions. So, I will go to see which assumptions or ideas have gone wrong. (0)
5. Suppose a friend sends you a research report on the production of a solar cell company called ABC. The report mentions that the company’s prospects are promising, so you decide to buy 10 shares. Before you buy, you suddenly hear from another solar energy company called XYZ which released good revenue news and received a large report from the financial media. The stock price rose 10% after the report. What happens when you hear this news?
a. I would probably see this news as a positive sign for the solar industry and buy the ABC shares right away. (3)
b. I will not buy ABC stocks now and begin to research XYZ stocks to see if my original decision is still correct. (2)
c. Because XYZ is obviously a popular stock, I will buy XYZ instead of ABC, it won’t be wrong to buy a rising stock. (1)
Each option is associated with a given number of points and the total score is the sum of the responses.
Pompian, M. M. (2011). Behavioral finance and wealth management: How to build optimal portfolios that account for investor biases. New Jersey: John Wiley & Sons, Inc.
Rieger, M. O., Wang, M., Huang, P.-K., & Hsu, Y.-L. (2022). Survey evidence on core factors of behavioral biases. Journal of Behavioral and Experimental Economics, 101912.