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How fear affects investing
Watching a horror movie can scare you into selling stocks earlier than you would have otherwise. That's the frightening evidence from research by Associate Marketing Professor Eduardo Andrade and PhD candidate Chan Jean Lee.
The pair outlined their findings in "Fear, Social Projection, and Financial Decision Making," published in November in the Journal of Marketing Research.
The article explains that a scared investor's early decision to sell stocks happens through "social projection". people's tendency to heavily rely on their own current feelings and inclinations when they estimate others' states of mind and preferences. As a result of social projection, a scared investor assumes other investors are also scared and that such fear will consequently drive a stock price down, prompting the one investor to sell early before the price sinks.
In their research, Lee and Andrade manipulated participants' emotions in a way completely unrelated to the stock market. They created one random group of participants who watched clips from horror movies such as "The Sixth Sense" and "The Ring." A second group watched documentaries about Benjamin Franklin and Vincent Van Gogh. After the screenings, researchers told the participants that it was time to move on to another experiment, a stock market simulation.
In the stock market simulation, participants went through 25 rounds in which they had an opportunity to sell a $10 stock. The rules stated that prices would decrease if any participant sold stock, and prices would increase if every player held onto their stocks. Each simulation involved approximately 26 anonymous participants, and therefore, prices could go up or down in any given round.
Scared players.those who watched the horror movies.were more likely to sell early in the game than those who watched the documentaries. Put simply, an incidental induction of fear triggered selling.
To test for social projection, Lee and Andrade added a twist. They reasoned that if social projection affects decision- making, the impact of fear should be reduced when people are less likely to try to project what others will do. Indeed, they found fear promoted early selling only when participants were told that the value of the stock was peer-generated. When participants were told that the stock value was randomly determined by a computer (where social projection is not a factor), the fear from horror movie watching had no impact on their decisions.
Andrade says the study suggests that controlling the influence of fear in financial decisions can be profitable. "Generally speaking, those who made more money were those who decided to stay longer in the simulation game."