Risk Tolerance, Marketing Information and Investment Decision Makings Under Loss Aversion: Theory and Evidence

66 Pages Posted: 24 Jul 2011

See all articles by Chi-Lu (Edward) Peng

Chi-Lu (Edward) Peng

Chung Hua University - Department of Finance; National Sun Yat-sen University

Date Written: June 23, 2011

Abstract

This study models and examines how changes in marketing information affects the degree of investor’s risk aversion, and in turn, influences investor’s decision-makings process under uncertainty. Under the mixed assumptions, the theoretical evidence in this study indicates that cumulative prospect theory (CPT) investors have propensity to discipline their depreciated assets and to sell their appreciated assets. Further, I find that CPT investors have less incentive to sell their holdings with higher advertising than ones with lower advertising when facing a paper gain or a paper loss. The empirical evidence indicates that advertising can help funds stem cash outflows, and finds investors are less willing to sell high performing investments with high fund family advertising than investments with low fund family advertising, and are more reluctant to redeem losing mutual funds with high fund family advertising than funds with low fund family advertising. For loser funds, a possible explanation from this study is that advertising seems to re-enforce the efficacy of recent investor decisions and adjust their beliefs to confirm past decisions, thus lets investors have more incentive to continue holding losing funds. For winner funds, this study infers that advertising may signal product quality, increase consumer satisfaction, brand equity and consumer loyalty that lead investors satisfied with their past decisions to have a greater propensity to retain their winning investments.

Keywords: Prospect Theory, Risk Tolerance, Decision Making, Marketing Information, Mutual Fund

Suggested Citation

Peng, Chi-Lu, Risk Tolerance, Marketing Information and Investment Decision Makings Under Loss Aversion: Theory and Evidence (June 23, 2011). Available at SSRN: https://ssrn.com/abstract=1893904 or http://dx.doi.org/10.2139/ssrn.1893904

Chi-Lu Peng (Contact Author)

Chung Hua University - Department of Finance ( email )

No. 707, Sec. 2, WuFu Road
Hsinchu, Taiwan 300
Taiwan

National Sun Yat-sen University ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

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