The Influence of Gain and Loss Frames on Information Acquisition and Cognitive Effort in an Investment Decision using Eye Tracking, EEG, and GSR

B. Fulmer, S. Escarfulleri.Florida State University

Research suggests that investors are prone to overconfidence, confirmation bias and motivated reasoning (Hirshleifer 2001). For this reason, the present

experiment studies financial decision making through physiological measures to determine how information acquisition and cognitive effort is impacted when exposed to both gains and losses in investment. We are trying to answer the

question: “How does information acquisition and cognitive effort change over a series of gains and losses?” Additionally, we are studying what pieces of

information financial analysts pay attention to most when making investment decisions. Participants were drawn from a population of graduate students in the

College of Business at the Florida State University completing the Masters of Business Administration (MBA), Masters of Science in Finance (MSF), and

Masters in Accounting (MAcc) programs. Each of the 90 students were measured during the experiment using a Galvanic Skin Response sensor (GSR) – which

measured tiny changes in the moisture in the skin that are often associated with effort; – an Electroencephalography sensor (EEG) – which measured electrical impulses in the brain associated with certain types of emotions; – and an eye-

tracker device. The participants were asked to go through a series of investment exercises using four pieces of information that would help them base their investment decisions: Management Guidance, Analyst Guidance, Financial Information and Ratios, and Stock Charts. Analysis is still ongoing, but it is expected the subjects would have primarily used the visual information

presented in the game, such as graphs, as opposed to the textual information provided to base their investment decisions upon. It was further expected that the MSF students would have the best investment results in the game. Finding this expected result will result in performing additional programmatic research to try to determine which types of visual information help financial analysts be more successful when trying to make investment decisions. The results of the

study can one day be applied to professional settings for better and more easily-made investment outcomes in the future.

The experiment is manipulated in a way that the participants each experience a series of 5 gains and 5 losses, in different orders. Prior to a participant’s

arrival, the GSR sensor is cleaned and the EEG sensors will be appropriately hydrated with saline solution. Upon arrival, participants are first seated in a height-adjustable chair in front of a computer screen where the eye tracker

has been set up. Participants are provided with a consent form and encouraged to ask questions prior to proceeding any further. When consent

to participate has been obtained, the experimenter explains to the participant how to correctly wear the GSR sensor on the wrist and

participants are supervised to ensure they have correctly positioned and fastened the GSR sensor. Next, the researcher helps the participant properly

don the EEG device on their head. The EEG headset is spring-loaded to facilitate effective contact between the sensors and the scalp. The EEG

Control Panel and Attention Tool software includes a sensor status diagnostic aid which is monitored by the researcher during setup. Adjustments are

made to the sensors as necessary based on the on-screen feedback. Once the experimenter confirms all the sensors are registering appropriately, the participant goes through the calibration routine. During the calibration

routine, participants first experience 3 minutes of relaxing music to acquire a baseline for the EEG and GSR sensors. Then, participants complete a

calibration of the eye tracker. The eye tracker calibration involves having the participant stare at a pulsating dot that appears in nine locations across the

screen. The eye tracker takes eye position measurements at each of the nine calibration points and then interpolates the measurements at other locations on the screen. The experimenter remains in the room to guide and supervise the setup and calibration of all of the equipment to ensure that the sequence

is fully completed, that the sensors appear to be operating and communicating with the computer correctly, and attend to any questions the participant may have prior to proceeding to the instructions and orientation.

H1: More sophisticated investors should place greater emphasis throughout the trials on factual (unfiltered – Financial Information and Stock charts) information typically used in formal valuation techniques compared to less sophisticated investors.

The MSF group, who are specifically trained to make investment decisions, spend more time on financial information compared to the other groups. In the T-test results, it is apparent that in a simple comparison of means, the MSF group spends more time on Financial information than members of the other two groups. By contrast, they spend less time on Stock charts compared to the other groups. The MAcc group spends more time on stock charts. The MBA group spends less time on Financial Information. The multivariate results are nearly identical except that when examined using the regression model, the MSF group’s use of stock chart information does not differ from the other groups.

H2: More sophisticated investors will spend more time integrating unfiltered financial information compared to less sophisticated investors.

Compared to other groups, the MSF group does not appear to deviate from the mean of integrations. However, the MAcc group does more integrations of unfiltered information, and the MBA group does less.

H3a: Investors will tend to focus more time and effort on positive signals if they choose to take a long position than if they choose to take a short position.H3b: Investors will tend to focus more time and effort on negative signals if they choose to take a short position than if they choose to take a long position.

The results show that in general when an individual chooses a Long position (predicting the stock price will go up) they work a bit less on the decision. Nearly all of the effort measures show lower levels compared to when a participant chooses a short position (predicting the stock price will go down). When the Area of Interest (AOI) Trend is Positive, there is no difference in the time spent on an AOI, but in general the effort levels are again lower. Most importantly, however, the Interaction between investment choice and the trend of the AOI is positive and significant indicating that higher levels of time and effort are associated with AOI information that trend in the same direction as the investment decision the participant made.

H4: Effort levels will be higher during a series of losses compared to effort levels measured during a series of gains.

The primary results show in a straightforward way that the effort levels, when measured appropriately, trend in the expected direction.

H5a: When the direction of a series of gains or losses reverses, levels of effort will increase more quickly (in fewer rounds) for investors when they begin to experience losses compared to the speed of decreases in effort when they experience gains.

No results to report for this Hypothesis, effort change is instantaneous for both directions.

H5b: When the direction of a series of gains or losses reverses, levels of effort will increase with greater magnitude over the series of investment decisions for investors when they begin to experience losses compared to the magnitude of decreases in effort when they experience gains.

Note that in the case of EDA (GSR measurement), the magnitude of the change in effort from the round just before a frame change to the round just after a frame change was much greater coming from a gain frame to a loss frame compared to that of the switch from a loss frame to a gain frame.

Some potential takeaways from this experiment are discovering the following: -What information type is preferred in an investment decision (across all trials).-How does information acquisition behavior change when investors experience a long series of losses (gains).-How much effort do investors experience expend after experiencing a long series of losses (or gains), and if this interacts with whether losses or gains are experienced first.-When behavior actually begin to shift after the change between gains and losses.-What information receives the most attention.-What information the participant directs more/less effort toward. -Whether effort levels differ between periods of gains and losses.

Introduction

Methods

Results

Discussion/ConclusionChoose one of the two options:o I expect the stock price to go up and choose to take a long positiono I expect the stock price to go down and choose to take a short

position

I am ________% confident in my decision

Submit

A long position is taken when you believe the stock price is going up. Shares are purchased now with the expectation that you can sell them later at a higher price. A short position is taken when you believe the stock price is

going down. You borrow shares from somebody to sell now while agreeing to return the same number of shares later. If you expect the share prices will be

going down, you will be able to repurchase them at a lower price. In real trading, there are often different costs and fees associated with taking a long or short position in a stock. For the purposes of this experiment, though, you

should assume that the costs are equivalent. There are no obstacles, advantages, or disadvantages to taking either a short or long position. You should base your decisions solely on your expectation of whether the stock

price will rise or fall in the near future.If after reviewing the information on the following screens you think the stock price will be going down, you will want to choose to take a short

position in the stock. If you think the stock price will be going up, you will want to choose to take a

long position in the stock.

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