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Motivation and emotion/Book/2022/Financial investing, motivation, and emotion

< Motivation and emotion | Book | 2022
Financial investing, motivation, and emotion
What role does motivation and emotion play in financial investing?
  1. [[1]] This article is not the finished version. For the completed book chapter, follow this hyperlink.

Overview

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  • Overview of financial investing
  • Definition of motivation
  • Definition of emotion
  • Overview how motivation influences financial investing and relevant theories
  • Overview how emotions influences financial investing and relevant theories
  • Improving financial investing with consideration of motivation and emotion

Focus questions:

  • How does motivation impact financial investing?
  • How do emotions impact financial investing?
  • How can an individual improve their investing by considering theories of motivation and emotion?

 

Suggestions for this section:

  • What is the problem? Why is it important?
  • How can specific motivation and/or emotion theories and research help?
  • Provide an example or case study.
  • Conclude with Focus questions to guide the chapter.

What is financial investing?

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  • Explanation of financial investing
  • Financial literacy including explanation of objective and subjective financial literacy (Aren & Hatice Nayman, 2020)

Motivations influencing financial investing

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  •  
    Figure 1. Investors are often motivated by seeking financial gain and increasing wealth
    Define motivation (Deci & Ryan, 2000)
  • Briefly summarise concept of Grand theories of motivation
  • Introduce concept of mini-theories of motivation
  • Introduce relevant theories of motivation as subheadings

Extrinsic motivation

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  • What is extrinsic motivation? (Deci & Ryan, 2000)
  • Seeking financial gain as an extrinsic motivation for investing (Croce, 2020)
  • Capital gain is the primary motive for property investor, in addition to rental returns (Pawson & Martin, 2021)

Intrinsic motivation

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  • What is intrinsic motivation? (Deci & Ryan, 2000)
  • Passion for investing as a motivating factor (Croce, 2020)

Emotions and financial investing

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  • Define emotion and explain core emotions
  • Emotions may be the opposite of rational investing decision making (Aren & Hatice Nayman, 2020)
  • Introduce relevant theories of emotion, then expand as subheadings:

Regret theory

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  • What is regret theory? (Loomes & Sugden, 1982)
  • How does regret impact investing behaviour? (Deuskar, Pan, D., Wu, F., & Zhou, H. (2021)

Risk taking

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  • Negative emotions such as fear and sadness affect investing behaviour as they are predictors of risk aversion (Aren & Hatice Nayman, 2020)
  • Positive emotions such as hope and pursuit of happiness may make investors more inclined to take risks (Aren & Hatice Nayman, 2020)

Ending effect

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  • The ending effect explains that individual preference shifts (and thus they are motivated to act accordingly) toward an emotional satisfaction when they near ‘the end’ (Xing et al., 2019)
  • Socioemotional selectivity theory posits that as an individual nears the end of their expected lifespan, their goals shift to emotion-related satisfaction  (Cartensen et al., 1999)
  • How does the ending effect and SST influence investing behaviour? (Xing et al., 2019)

Improving financial investing by considering motivation and emotion

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  • Preventing emotion driven investments by engaging with an investment advisor (Maymin & Fisher, 2011)
  • Risk profiling (Van den Bergh-Lindeque et al., 2022)
  • Dollar cost averaging to manage investor’s emotions (Statman, 1995)

Quiz

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1 Extrinsic motivation is irrelevant to financial investing:

True
False

2 Dollar cost averaging may reduce emotional investing decisions:

True
False


Conclusion

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  • Summarise key points by summarising relevant theories and answering focus questions
  • Take-home message 1: Motivation and emotion impact financial investing
  • Take-home message 2: There are strategies that investors can use to reduce aforementioned impact

See also

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References

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Aren, S., & Nayman Hamamci, H. (2020). Relationship between risk aversion, risky investment intention, investment choices: Impact of personality traits and emotion. Kybernetes, 49(11), 2651–2682. https://doi.org/10.1108/K-07-2019-0455

Carstensen, L. L., Isaacowitz, D. M., & Charles, S. T. (1999). Taking time seriously. A theory of socioemotional selectivity. The American psychologist, 54(3), 165–181. https://doi.org/10.1037//0003-066x.54.3.165

Deci, R. M., & Ryan, E. L. (2000). Intrinsic and extrinsic motivations: Classic definitions and new directions. Contemporary Educational Psychology, 25(1), 54-67. https://doi.org/10.1006/ceps.1999.1020

Deuskar, P., Pan, D., Wu, F., & Zhou, H. (2021). How does regret affect investor behaviour? Evidence from Chinese stock markets. Accounting and Finance (Parkville), 61(S1), 1851–1896. https://doi.org/10.1111/acfi.12646

Loomes, G., & Sugden, R. (1982). Regret Theory: An Alternative Theory of Rational Choice Under Uncertainty. The Economic Journal (London), 92(368), 805–824. https://doi.org/10.2307/2232669

Maymin, P. Z., & Fisher, G. S. (2011). Preventing Emotional Investing: An Added Value of an Investment Advisor. The Journal of Wealth Management, 13(4), 34–43. https://doi.org/10.3905/jwm.2011.13.4.034

Pawson, H., & Martin, C. (2021). Rental property investment in disadvantaged areas: the means and motivations of Western Sydney’s new landlords. Housing Studies, 36(5), 621–643. https://doi.org/10.1080/02673037.2019.1709806

Statman, M., (1995). A Behavioral Framework for Dollar-Cost Averaging. Journal of Portfolio Management, 22(1), 70–78. https://doi.org/10.3905/jpm.1995.409537

Van den Bergh-Lindeque, A., Ferreira-Schenk, S., Dickason-Koekemoer, Z., & Habanabakize, T. (2022). What makes risk-averse investors tick? A practitioners guide. Cogent Economics & Finance, 10(1). https://doi.org/10.1080/23322039.2022.2111786

Xing, C., Meng, Y., Isaacowitz, D. M., Wen, Y., & Lin, Z. (2019). The Ending Effect in Investment Decisions: The Motivational Need for an Emotionally Rewarding Ending. Personality & Social Psychology Bulletin, 45(4), 510–527. https://doi.org/10.1177/0146167218788829

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