The Difference Between Fuzzy Trace Theory And Heuristic Theory In Risk Taking In The Context Of Financial Investment

Abstract

The purpose of this paper is to compare two theories, namely fuzzy trace theory and heuristic theory in the context of risk taking in financial investment decisions. Fuzzy trace theory is a global memory model developed to explain the findings that are against witha certain feeling instution about the relationship between memory and thought. Meanwhile, heuristic theory mentions that a person's behavior in making decisions with limited and short time is because of only limited informations and all of them are in the conditions of uncertainty. The heuristic theory states that the making of fast decision involves the elements of perception, memory, framing effect and the ease of processing information and overload informant’s condition. The statement of the heuristic theory is not in accordance with the main principle of the fuzzy trace theory, in which a person encodes, stores, retrieves, and forgets her/his verbatim memory and gist separately and in paralel. The difference of the two theories influences the risk taking in the field of financial investment. Some factors affecting the risk taking are as the followings: (1) Financial literacy (including memory, information and investor knowledge); (2) Emotion (prioritizing her/his feeling and intuition in decision making); and (3) Risk perception (considering one’s feeling and perception in making risk decisions). Based on the conceptual analysis of the factors that influence risk taking, investors need to pay attention to: (1) financial literacy; they should consider the fuzzy trace theory, (2) emotion; they should consider the heuristic theory in making decisions, (3) risk perception; they should consider the heuristic theory. It is expected that this paper is beneficial for investors and potential investors to consider some points in taking some policies suitable either with fuzzy trace theory or heuristic theory in risk taking.