Conservative Bias and Endowment Effect in Investment Decision-Making Process: Development and Validation of Scale

Abstract

Objective: This work aims to investigate two biases - conservatism and endowment effect - to then build an instrument capable of measuring them. Theoretical Framework: The advancement of studies in behavioral finance has led to the conclusion that individuals evaluate their gains and losses based on individual references. Thus, the perception from which they make decisions is individual and, therefore, subjective. Method: Based on a literature review, the main characteristics of both biases were collected and then a questionnaire was applied to a sample of 150 managers. The data collected from the answers to the questionnaire were subjected to exploratory factor analysis and Cronbach reliability test. Results and Discussion: The findings of this research highlighted three components to the conservatism bias. These components are: Conservatism in investment decisions, Conservatism and security, Conservatism in financing decisions. For the endowment effect, a component was identified and named with the same name as the effect. Research Implications: The indicators of the factor Conservatism in Investment Decisions show that managers are attached to information and past situations, so that they feel uncomfortable in the face of new scenarios. The indicators Conservatism and security and Conservatism in financing decisions indicated the preference for safer investments. The endowment effect indicators were lower, however, they were still able to highlight the indirect influence on the managers in the sample. This problem may arise from the nature of the assets managed by managers, in which established ownership is not perceived. Originality/Value: This study contributes to the literature by develop an instrument capable of identifying and measuring the conservatism and endowment effect biases of managers to pave the way for a discussion about the topic.