Growth and Decline of Assets: On Biased Judgments of Asset Accumulation and Investment Decisions

• Authors: Nichel Gonzalez , Ola Svenson
• Languages of publication: EN

Abstracts

EN

Previous research showed that accumulations of capital following stationary interest rates are underestimated by human judges. Hyperbolic discounting was suggested as a descriptive and explanatory model for this phenomenon. First, we investigated judged accumulated capital after a period of annual growth and decline. The degree of underestimation increased with accumulated growth and the results supported hyperbolic discounting as a descriptive model on the group level. However, the hyperbolic model did not apply to the data for one third of the participants. Second, we investigated how investment decisions were related to capital accumulation before the investments and to judgments of the possible outcomes of the future investments. To our surprise, the participants’ judgments of expected future accumulated capital did not add predictive power to predictions based on whether there was growth or decline before the investment decision. Unfortunately this strategy leads to suboptimal investment decisions.

Keywords

EN

investment decisions; discounting; uncertainty; growth; decline

• Publisher: Committee for Psychological Sciences, Polish Academy of Sciences
• Journal: Polish Psychological Bulletin
• Year: 2014
• Volume: 45
• Issue: 1
• Pages: 29-35

Contributors

author

Nichel Gonzalez

• Risk Analysis, Social and Decision Research Unit, Department of Psychology, Stockholm University, SE-106 91 Stockholm Sweden

author

Ola Svenson

• Risk Analysis, Social and Decision Research Unit, Department of Psychology, Stockholm University, SE-106 91 Stockholm Sweden
• Decision Research, Eugene Oregon 97401, USA