Explanations determine the impact of information on financial investment judgments

Elizabeth J. Mulligan · Reid Hastie

18 citations0/0 files storedJournal of Behavioral Decision Making

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Decision-Making and Behavioral Economics Financial Markets and Investment Strategies Financial Literacy and Behavior

Abstract

Previous research has shown that some types of judgments are influenced by the results of an explanation-seeking comprehension process. The present experiments investigated novice investors' stock price forecasts and investment decisions. Information presented in a narrative story order was hypothesized to promote the construction of a coherent mental representation that would affect how information was interpreted and subsequently used to predict stock price changes. The results showed that outcome information had a distinctively high impact, but only when the information was read in story order. These results imply that presentation order affects the mental representation of evidence relevant to the forecast, and the form of that mental representation moderates the impact of individual pieces of information on the ultimate judgment. Copyright © 2005 John Wiley & Sons, Ltd.

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1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1970Efficient Capital Markets: A Review of Theory and Empirical Work 1998Comprehension: A Paradigm for Cognition 1988The role of knowledge in discourse comprehension: A construction-integration model.n.d.A model of investor sentiment /1998A model of investor sentiment1We are grateful to the NSF for financial support, and to Oliver Blanchard, Alon Brav, John Campbell (a referee), John Cochrane, Edward Glaeser, J.B. Heaton, Danny Kahneman, David Laibson, Owen Lamont, Drazen Prelec, Jay Ritter (a referee), Ken Singleton, Dick Thaler, an anonymous referee, and the editor, Bill Schwert, for comments.1 1994Constructing inferences during narrative text comprehension.1975Representation and Understanding: Studies in Cognitive Science

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