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

31 Pages Posted: 7 Aug 2005  

Sonya S. Lim

DePaul University - Department of Finance

Alok Kumar

University of Miami - School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

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 Classification: G11, G12

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: https://ssrn.com/abstract=505162 or http://dx.doi.org/10.2139/ssrn.505162

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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