The effect of setting goals and emotions on asset allocation decisions

Abstract

Purpose

The purpose of this paper is to conduct a controlled experiment to examine the effect of goal setting and affect framed feedback on repeated asset allocation investment decisions.

Design/methodology/approach

The design of the experiment is a 2×2 between subject design. Subjects allocated monies among four investments for 20 periods. One manipulation varied whether subjects received performance feedback in the form of a happy or sad face, while another manipulation varied whether subjects set a financial goal for themselves and received goal attainment performance feedback.

Findings

The main findings include: subjects initially allocate assets in a manner roughly consistent with their stated preference for risk; prior year asset performance leads subjects to make significant changes in portfolio asset allocation in a manner consistent with beliefs of positive autocorrelation in asset returns; and the addition of happy or sad faces to performance feedback information leads to even greater changes in asset allocation.

Originality/value

Using ideas from the theory on the self‐regulation of behavior and the role of affect in decision making, the authors develop an original framework to account for the results.

Citation

Sundali, J.A., Stone, G.R. and Guerrero, F.L. (2012), "The effect of setting goals and emotions on asset allocation decisions", Managerial Finance, Vol. 38 No. 11, pp. 1008-1031. https://doi.org/10.1108/03074351211266766