Fear, Social Projection, and Financial Decision Making

Abstract

The number of individual investors who trade stocks online has significantly increased in recent years. Surprisingly, consumer researchers have paid little attention to how emotions influence individual investors’ stock-trading decisions. In a series of three experiments, this paper investigates the impact of incidental fear on the decision to sell in a stock market simulation. The results show that fearful (vs. control) participants sell their stock earlier (experiments 1 through 3). This effect, however, is contingent on particular features of the market. Fear leads to early sell-off when the value of the stock is peer-generated, but not when the value of the stock is computer-generated (experiment 2). Early sell-off as a result of incidental fear is also observed when participants believe their risk attitude is common among the participants in the market, but not when they believe their risk attitude is very unique (experiment 3). Social projection - i.e., people’s tendency to rely on their current state of mind to estimate other people’s actions - explains the phenomenon.

Keywords: Emotion, Feeling, Fear, Social Projection, Decision Making, Behavioral Finance

JEL Classification: M31