PRIOR TRADING OUTCOMES AND SUBSEQUENT PORTFOLIO RISKS: USING SECURITIES DEALER IN TAIWAN AS AN EXAMPLE

This study examines whether the investment behavior of securities dealers is consistent with the predictions of the house money and break-even effects. Using the stock portfolios, dealers hold in Taiwan from 1996 to 2013 as a sample, we test the relationship between trading gains/losses and subsequent changes in portfolio risk. The results show that only gains with low risks, not all gaining situations, cause subsequent risk preferences, and regardless of the size of the trading loss, there is not a significant change in subsequent risk. Controlling dealers’ characteristics, industry competition, and the stock market condition, the evidence shows that the house money effect on dealer behavior exists after earning low-risk profits and does not support the break-even effect. These results are qualitatively unchanged after robustness checks that primarily exclude dealer overconfidence effect and ensure that the risk-taking behavior under low risks results in a decrease in gains and thus not a rational behavior.

Impact of Casino Free Play on the Wagering Behavior of Light- and Medium-User Groups: The Importance of Winning at the Bottom of the Database

This study examined the extent to which free-play credits affected spend-per-trip levels in slots, with a focus on contributions from the loyalty program’s (LP) light- and medium-user tiers. These user groups represent the bulk of LP members, and also comprise the area of the database for which spending gains are most important and equivocal. Daily, tier-level performance data were collected from four different casinos, which were owned and operated by a common parent company. Analysis of player performance data failed to indicate group-level differences in the spend-per-trip results produced by free-play redeemers and non-redeemers, within each of two tiers. These findings were produced by both parametric and nonparametric measures. The free-play group (FP) recorded a mean daily T-win that was significantly greater than that generated by the no-free play group (NFP) on a maximum of 2 days (out of 365), across all four properties and both tiers. Given that the players in FP were staked with free credits, it would appear that these awards served as bankroll substitutes, rather than sources of incremental play. With respect to own-money wagering, the lack of significant increases in win on free-play trips may be most aligned with the prospect-theory-with-memory effect. While our work expanded the literature by examining decision-making under risk, beyond two stages, our results did not generally support the house-money effect. For management, our findings signaled the need for a program review, as these expensive annual campaigns comprised a substantial percentage of the casino marketing budget.

How Situation Affects Risk Taking Behavior

This paper examines how situation affects risk taking behavior. Two theories predict different outcomes on the effect of situation to risk taking. House Money Effect predicts that positive situation will result in increased risk taking due to availability of slack that can be risked. On the other hand, negative situation will decrease risk taking because of reduced slack. Thus House Money Effect describes positive relation between situation and risk taking behavior. On the contrary according to Reflection Effect from Prospect Theory, human beings are risk averse in gain situation but risk seeking in loss situation. Reflection Effect thus predicts that positive situation will result in decreased risk taking while negative situation will result in increased risk taking, in other word negative relation between situation and risk taking. To test which theory better describes the relation between situation and risk taking behavior, we examine how company performance affects risk taking behavior of the top management. Company performance is proxied using Return of Asset. Risk taking behavior is proxied using change of debt level. The result shows negative relation between situation and risk taking, and thus support Reflection Effect in Prospect Theory.

Behavioral biases and retirement assets allocation of corporate pension plans

Purpose The purpose of this paper is to investigate the existence of behavioral biases, disposition effect and house money effect in investment decisions of defined benefit pension funds. It investigates the determinants of portfolios by examining whether pensions display risk seeking or risk aversion behavior in reaction to prior gains and losses. Design/methodology/approach The first research question is to examine the impact of prior period’s return and αs on existing portfolio allocation in equity, debt, real estate and other assets. In order to test this relationship, four separate regressions are estimated using the pooled data. Regression helps in examining the relationship between prior gains with current allocation in four categories of assets of varying degrees of riskiness (stocks, debt, real estate and other assets). In order to investigate the second research question on whether pension funds increase (decrease) their investments in risky (safer) assets due to prior gains and αs, the four variables representing the changes in portfolio allocation for each asset class over one period are employed. These changes in allocation are regressed against the prior year’s actual return, expected return, αs and a set of control variables. Findings The results suggest significant negative (positive) relationship between prior positive returns and αs with portfolio allocation in risky (safer) assets. Also, there is an increased (decreased) investment in safer (risky) assets following prior period’s positive returns and αs. The findings confirm the existence of disposition effect, while there is no evidence of house money effect. Originality/value The portfolio allocation of pension plans provides unique setting to investigate the relevance of behavioral finance and examine the role of psychological biases on risk taking. This study attempts to contribute to the literature by empirically investigating whether the tenets of behavioral finance are relevant in defined benefit pension fund’s portfolio allocation decisions. Specifically, it focuses on the determinants of portfolio choices by directly investigating pension funds’ reaction to prior period’s actual as well as risk adjusted return (or αs – the difference between the actual and expected return).

Timing for Dollars: How Option Exercisability Influences Resource Allocation

Stock options have been advocated to encourage managers to make long-run investments like R&D and capital expenditures (CAPX) that entail upfront costs with the potential to generate favorable long-term returns. However, the effect of options on managerial decisions depends on managerial beliefs about how the stock market reacts to firm behavior. If, consistent with empirical evidence, managers believe that stock prices increase in the short term from increased R&D, but not CAPX, then stock option exercisability—which dictates when managers can receive option payouts—should influence resource allocation. We also consider the effect of changes in the value of options over time. Results from a study of more than 6,500 observations from about 1,000 manufacturing firms over 18 years show that unexercisable stock options positively influence CAPX but not R&D, while exercisable stock options positively influence R&D but not CAPX. Both patterns are consistent with behavior that increases managerial payoffs but not necessarily firm performance. In addition, we find an expected negative association between underwater options and CAPX but no evidence of a corresponding positive relation with R&D. Finally, we find partial evidence of a house money effect that makes allocations to CAPX and R&D sensitive to recent changes in option values.

The role of house money effect and availability heuristic in investor behavior

Purpose The house money effect is proposed to describe that people appear to consider large or unexpected wealth gains to be distinct from the rest of their wealth, and are thus more willing to gamble with such gains than they ordinarily would be. On the other hand, the availability heuristic describes that people tend to have a cognitive and systematic bias due to their reliance on easily available or associational information. The purpose of this paper is to employ these behavioral perspectives in an empirical model regarding the January anomaly to explore investor behavior in Taiwanese stock market with bonus culture and well-known electronics industry. Design/methodology/approach This study uses the conventional and standard dummy variable regression model, as employed in prior studies, and further includes some control variables for firm, industry and macro-economic level factors. Moreover, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine the hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect. On the other hand, the authors also use the entire sample period of 1990-2014 for understanding whether the magnitude of January effect is different. Findings The empirical results indicate that Chinese bonus payments in January induce a strong January effect in the Taiwanese stock market, especially when most listed firms have positive earnings growth in the preceding year, suggesting a house money effect. Moreover, this study further provides some preliminary evidence that the higher January returns due to bonus culture are apparent only in the electronics industry when both Chinese New Year and bonus payments are in January, implying the role of availability heuristic based on the electronics stocks in investor behavior before the impending stock exchange holidays. Some robust tests show qualitative support. Research limitations/implications The major contribution of this study is to extend the existing research by incorporating cultural and industrial factors with behavioral finance, thus enriching the literature on the causes of seasonality for Asian stock markets. Practical implications This study also has behavioral implications of investments for investors in the Taiwanese stock market, especially for foreign institutional investors which pay close attention to this market. Originality/value This study first applies and examines the culture bonus hypothesis with regard to how employees who receive culture bonuses in January can change their attitudes toward risk and induce the January effect from the concept of mental accounting. Moreover, this study further proposes and examines the extended culture bonus hypothesis related to how the January effect due to culture bonus is different for the electronics and non-electronics industries when taking into account the stock market holidays from the concept of availability heuristic.