The Effects of Time Pressure on the Belief Revisions of Nonprofessional Investors

Abstract

This is the first study to experimentally investigate the interactive effects of time pressure and the order of information by integrating a time pressure variable into the predictions of the belief-adjustment (BA) model. Substantial research documents the continuing importance of both order effects and time pressure in a variety of accounting contexts. Prior accounting research (Kahle, Pinsker, & Pennington, 2005; Trotman & Wright, 2000) as well as Hogarth and Einhorn (1992) in their original article on the BA model have called for an investigation of the potential moderating effect of time pressure on order effects; however, no such research exists. We utilize psychology theories of arousal to propose and examine a path model of the effects of time pressure on nonprofessional investors’ belief revisions. Individual investors make a stock price judgment and a short-term investment decision following the receipt of a news announcement that contained mixed (i.e., positive and negative) information about the company’s stock. We manipulated the order in which the information is presented to participants and the time available to make the stock price judgment and investment decision. Our findings support the proposed model. First, investors trying to make a short-term profit under a time limit perceived significant time pressure, even when the time available to make the decision is equal to the time usually required under no time pressure to make such a decision. Second, perceived time pressure had a significant, positive effect on individual investors’ motivation but also on their stress and on perceived task difficulty. Perceived task difficulty had a significant interactive effect with the order of information on individual investors’ investment decisions and there is an optimal level of perceived time pressure and consequent perceived task difficulty at which order effects are eliminated. Third, greater motivation and stress caused increased stock price estimations and greater investments into the stock, which may explain individual investors’ excessive trading observed in prior research. This effect was reversed at very high levels of perceived task difficulty resulting in a disconfirmation bias, presumably to ease cognitive strain and to avoid a loss when the time is too short to make an informed decision.