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Putting money into a specific investment just because it's the most familiar or stands out in some way is an all-too common mistake. A recent study by Vanderbilt business professors explains why we do it, and points to a solution for making better investing choices.
"Premature infatuation and commitment in individual investing decisions," coauthored by Steven Posavac, E. Bronson Ingram Professor in Marketing, and Nicolas Bollen, Frank K. Houston Professor in Finance, is published in the Journal of Economic Psychology. Mark Ratchford of Tulane University and David Sanbonmatsu of the University of Utah are co-authors.
Investors - Stock - Fund - Detriment - Posavac
"Everyday investors can often become overly attached to a particular stock or mutual fund, sometimes to their financial detriment," said Posavac. "We wanted to understand how internal factors such as top-of-mind awareness or external cues such as media attention can cause investors to become prematurely infatuated with a particular investment."
The researchers conducted three experiments in which they primed participants to focus more on one investment choice than three others.
Participants - Summaries - Funds - Rate - Funds
In the first, participants were given summaries of four comparable mutual funds, randomly assigned to rate one of them, and then asked to choose one of the funds to invest in. Participants were much more likely to invest in the fund they were assigned to rate than any of...
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