Investment Decision Behavior Research Articles

About the Authors

About the Authors

From the Editors…

This issue's “From the Editors…” column is coauthored with Managing Editor Kelly Kophazi. In addition to introducing our articles, we report here on the past year from the perspective of the editorial office. The authors of the first three articles conducted laboratory experiments to examine decision behavior in financial investment decisions, bidding in auctions, and inventory ordering decisions. First, Dennis Vrecko, Alexander Klos, and Thomas Langer report on the “Impact of Presentation Format and Self-Reported Risk Aversion on Revealed Skewness Preferences.” Our second article is “A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions,” by Richard Engelbrecht-Wiggans and Elena Katok. The third article, by Srinagesh Gavirneni and Yusen Xia, is on “Anchor Selection and Group Dynamics in Newsvendor Decisions—A Note.” Our final article, describing the application of decision analysis for an Italian waste processing decision, is “Resource-Limited Multiattribute Value Analysis of Alternatives for Immobilizing Radioactive Liquid Process Waste Stored in Saluggia, Italy,” by Alan J. Brothers, Shas V. Mattigod, Denis M. Strachan, Gordon H. Beeman, Paul K. Kearns, Angelo Papa, and Carlo Monti.

Learning from foreign investment by rival firms: Theory and evidence

We offer an alternative explanation for follow-the-leader behavior in foreign investment decisions based on Bayesian learning by rival firms. We test the implications of the model through a panel count data sample of MNEs that have invested in Central and Eastern Europe over the period 1990–1997. Interacting the measure of rivals' investment in country-industry pairs with uncertainty, we are able to identify the channel of Bayesian learning about revenue postulated by the model as the only one consistently generating the detected follow-the-leader behavior of foreign investments. The empirical findings are robust with respect to different model specifications.

Cyclic behavior in dynamic investment decisions for deregulated energy markets

In the first years after the deregulation of the electricity industry, investment into new generation capacity has not taken place on a large scale in any central european country. Recent increases in prices indicate that investment could be very profitable. However, the fear is that the need for new capacity can be overestimated and that could lead to a decrease in prices and profits and consequently to a reduction/stop of new investments. The aim of this paper is to model and analyze factors that influence the stability of electricity prices. The electricity market is modeled using a Cournot game and the stability of electricity prices is analyzed by simulations.

Retirement Savings Behavior of Higher Education Employees

Higher education employees often participate in university-sponsored defined contribution pension plans that place the investment decision responsibility upon them. In order to examine investment decision-making behavior with retirement savings plans we investigated attitude-mediated, individual difference determinants of risky decision-making behavior in employer-sponsored defined contribution retirement plans. Using a field survey of 795 higher education employees, who participated in one of four defined contribution savings plans, we tested a risk taking model using data on the employees’ investment allocations in their defined contribution savings plan. We found that an attitudinal preference toward risk and a perception of opportunity served as mediators for the relationships among employees’ dispositional characteristics and their retirement savings behavior. We also found that investment knowledge directly affected risk taking behavior. Implications of the results for higher education institutions are discussed.

The Value Of Advice

Observing that many economists have studied the effects of human behavior on investors and the stock market, the author asserts that the growth and collapse of the technology stock “bubble” and the ensuing volatility in the markets have spurred interest in the once-controversial field of behavioral finance. She argues that the catastrophic September 11 terror attacks on the United States have led the role of human behavior in investment decisions to take on new significance. Yet, though markets reacted in dramatic fashion to the September attacks, she wonders whether they were efficiently using new information to reflect a suddenly weaker economy, or simply overreacting based on fear and anxiety. She argues that professional advisors have an important role to play, particularly in difficult times, as they can help their clients decipher in a more dispassionate manner the nature of the investment circumstances and thus select the strategic response most appropriate given their individual needs.

Venture Capitalists, Unquoted Equity Investment Appraisal and the Role of Accounting Information

Abstract This paper aims to add to the understanding of venture capitalists' investment decision-making behaviour by providing evidence relating to the general policies they adopt in their approaches to due diligence, valuation methods, benchmark rates of return and adjustments for risk. The evidence shows that in order to address potential adverse selection problems, venture capitalists use a wide range of accounting and non-accounting information and techniques relating to the specific factors concerning a particular investment. Unpublished accounting information and subjective information are important. Significant differences emerge in the approaches to valuation and use of accounting information for valuation purposes between types of venture capitalist, according both to their stage of investment focus and whether they were captive or independent.