(August 12, 2013) – The way past returns and projections are presented—in relative or absolute terms—can change the returned forecasts themselves, a study has found.
Jiayi Balasuriya of the University of Westminster, City University London finance professor Gulnur Muradoglu, and psychologist Peter Ayton, also of City University London, authored the study.
Participants who were told they had poor absolute performance in the past tended to make higher future return projections than those who were informed of—or “framed” with—positive absolute performance.
Optimism was lower, however, when the researchers framed past performance in relative terms.
“We suspect the underlying reason for such differences is that when people consider their investment in absolute terms,” Balasuriya, Muradoglu, and Ayton wrote, “achieving a positive return makes them feel satisfied with the achieved absolute figures and such satisfaction with the previous return make them less ‘aggressive’ in forecasting future returns to avoid potential disappointment. When the portfolio return is low in absolute values, people are not willing to adjust their expectation downwards accordingly.”
Certain characteristics affected investment expectations too: the authors found that financial optimism correlated positively with risk tolerance, relative salary expectation, and being male.
Those who identified as extroverted tended to forecast their model portfolio’s returns lower than others. Similarly, more humble participants had more humble expectations of their performance in financial markets.
The authors did caution that “the reason why certain dimensions of personality are correlated with financial optimism is beyond the scope of this thesis.”
A total of 672 participants of varying fluency in financial theory were involved in the study.
Read Jiayi Balasuriya, Gulnur Muradoglu, and Peter Ayton’s entire paper—“Feedback, Framing, Personality and Risk Attitude : Experiments on Factors Affecting Financial Optimism”—here.