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How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?

Alok Kumar
University of Texas at Austin

Sonya S. Lim
DePaul University - Kellstadt Graduate School of Business


June 2007

EFA 2005 Moscow Meetings

Abstract:     
This study examines whether the framing mode (narrow versus broad) influences the stock investment decisions of individual investors. Motivated by the experimental evidence, which suggests that separate decisions are more likely to be narrowly framed than simultaneous decisions, we propose trade clustering as a proxy for narrow framing. Using this framing proxy, we show that investors who execute more clustered trades exhibit weaker disposition effects and hold better diversified portfolios. We also find that the degree of trade clustering is related to investors' stock preferences and portfolio returns. Collectively, the evidence indicates that the choice of decision frames is likely to be an important determinant of investment decisions.

Keywords: Narrow framing, trade clustering, disposition effect, portfolio diversification, prospect theory

JEL Classifications: G11, G12

Working Paper Series

Date posted: August 07, 2005 ; Last revised: June 04, 2007

Suggested Citation

Lim, Sonya S. and Kumar, Alok, How Do Decision Frames Influence the Stock Investment Choices of Individual Investors? (June 2007). EFA 2005 Moscow Meetings. Available at SSRN: http://ssrn.com/abstract=505162


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Contact Information

Alok Kumar (Contact Author)
University of Texas at Austin ( email )
Red McCombs School of Business
1 University Station, B6600
Austin, TX 78712
United States
512-232-6824 (Phone)
512-471-5073 (Fax)
HOME PAGE: http://www.mccombs.utexas.edu/faculty/Alok.Kumar
Sonya S. Lim
DePaul University - Kellstadt Graduate School of Business ( email )
1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
HOME PAGE: http://mozart.depaul.edu/~slim/
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