My reference point, not yours

Buchanan, Joy

doi:10.1016/j.jebo.2020.01.023

Cited by 11 publications

(3 citation statements)

References 34 publications

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“…Finally, we show that investors create their own unique references points and caution should be exercised when adopting the 52‐week high/low as the reference point (Buchanan, 2020). The reference point of interest is the previous selling price.…”

Section: Discussionmentioning

confidence: 92%

“…A critique of adopting the 52‐week high/low is that this reference point is not unique to the investor. Buchanan (2020) emphasizes that each person has a different life experience which influences his or her unique reference point from which to evaluate any gains and losses. Even though concepts such as loss aversion are pervasive, it is not clear what reference point people use to gauge losses and gain from.…”

Section: Literature Reviewmentioning

confidence: 99%

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Buy and buy again: The impact of unique reference points on (re)purchase decisions

Willows

Richards

2022

Int Rev Finance

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Behavioral finance has uncovered that investor engage emotionally when trading. We investigate how three psychological factors influence purchase and repurchase decisions: representativeness, the influence of prior gains, and reference points. Using trading data of 7200 UK investors we find that purchase decisions are influenced by representative heuristic and repurchase decisions are influenced by both representative heuristic and prior profitability. Further survival analysis showed that investors use the prior selling price as a unique reference point. Investors are more likely to repurchase a stock when trading above its reference point, but more likely to initiate the repurchase when trading below. Investors are influenced by previous experience and engage learning behavior when they seek to reinforce past success. As reference points are inferred but infrequently researched, this research adds to the literature and provides important and robust results for those engaging with financial planning clients.

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Section: Discussionmentioning

confidence: 92%

Section: Literature Reviewmentioning

confidence: 99%

Buy and buy again: The impact of unique reference points on (re)purchase decisions

Willows

Richards

2022

Int Rev Finance

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“…Even in environments where trading can reveal fundamental values, "rational expectation" models do not very successfully fit belief data. And most experimental markets are set up to be far more favorable to revealing information and forming beliefs than the environment the typical investor operates in (Buchanan, 2020).…”

Section: Learning To Forecastmentioning

confidence: 99%

Investor beliefs in the midst of a market crash and the COVID 19 pandemic: Survey and experimental evidence.

Guerrero¹

2021

Decision

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In March of 2020, the stock market fell 34%, due to the COVID-19 pandemic. How do market crashes affect the way investors form beliefs regarding future market returns? To investigate, we surveyed two mTurk panels during the March 2020 meltdown. The first survey was completed after the S&P 500 fell 9.5% on March 12, and the second survey was distributed the next day on March 13 after S&P 500 rose by 9.3%. In the midst of extreme market volatility and widespread media reporting of investor panic, most participants reported that beliefs were formed thoughtfully and in line with traditional financial advice. We next report the results of a controlled laboratory experiment where participants provided incentivized forecasts and allocated money between a risky and a riskless asset for 56 periods, with one group experiencing a severe market crash. Comparing participant forecasts against six different classes of belief models, we find the best fitting models are a naïve short memory Recency model, and a short memory Cumulative Prospect Theory model, along with an Adaptive Expectations model. The experimental results are consistent with the idea that recent returns encourage extrapolative beliefs. In contrast, the mTurk survey results convey that investors claim to be more thoughtful than short-term extrapolative models suggest. We conclude by suggesting that investors can both be thoughtful and reactionary depending upon the context of the investing environment.

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