Chapter 1: Framing Effects, Selective Information and Market Behavior: An Experimental Analysis
Erich Kirchler, Boris Maciejovsky and Martin Weber INTRODUCTION Communication about asset return distribution is a central issue in finance. Investment advisors are legally obligated to inform clients about potential investment risks, which are usually expressed as the variance or standard deviation of the underlying distribution of the investment’s future returns. Investors are implicitly assumed to accurately perceive and interpret statistical information, irrespective of how that information is presented. In recent years, many new ways of acquiring financial information have become available, with the main source, of course, being the Internet. Yahoo!Finance, for instance, offers free market information, business news and personal finance plans, while BigCharts allows investors to create personalized interactive charts. Market data provider eSignal even assumes a positive relationship between information quantity and investment success by promising ‘You’ll make more, because you’ll know more.’ Evidence suggests that investors generally benefit from the provision of information. Empirical studies, however, indicate that more information does not necessarily lead to more knowledge. In the psychological literature, this is referred to as the illusion of knowledge, and is confirmed empirically for many decision domains. For example, Park (2001) shows that even when news media recipients are socially involved with issues covered in the media, they are prone to the illusion of knowledge. The tendency increases the more recipients use the media. In the finance domain, Barber and Odean (2001) investigate the performance of investors who switched from phone-based trading to internet trading. While these traders initially beat the market by about...
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