Risk Information Impact on Investment Decisions: Experimental Test of PMM Theory, a Case of Indonesia

Abstract

The aim of this study is to examine the Probabilistic Mental Model (PMM) Theory as an explanation of the framing effect in the context of reporting risk in different formats in Indonesia. The study was conducted using an online field experimental method with 3x4x2 mixed design, involving 54 investment analysts as participants. Experiments were conducted to test whether different formats of risk information—given the time sequence associated with the framing effect as explained by the PMM Theory—influence the investment decision-making process. The results show that participants chose to take action that is not at risk when the information presented is in a positive frame. Gains or a loss of information that accompanies the risk information does not affect participants’ decision relating to investments they would do. The investment decisions tend to avoid risk. Decision makers in a positive frame risk conditions do not make decision that reduce the risk of gains they already have. When risk information is presented in a negative frame, the participants chose to make decisions that minimize losses that may arise as the results of an investment decision. Practical implication of this study is that the investor needs to respond to the framing effect because a similar problem with a different frame may result in a different choice. Investors need to be encouraged to improve the knowledge and reduce bias in decision-making caused by the presence of framing in a single set of accounting information. This study has proven to be useful in improving the ability to analyze risk reports by financial analyst.

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