Cognitive and affective styles in financial decision-making

Noordink, Peter John. (2005). Cognitive and affective styles in financial decision-making PhD Thesis, School of Business, The University of Queensland.

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Author Noordink, Peter John.
Thesis Title Cognitive and affective styles in financial decision-making
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 2005
Thesis type PhD Thesis
Supervisor Professor N. Ashkanasy
Dr M. Sinclair
Total pages 338
Collection year 2006
Language eng
Subjects L
350200 Business and Management
720403 Management
Formatted abstract
Over the past three decades there has been considerable debate on whether the use of intuition is valid for making successful decisions under uncertainty and risk. Extensive debate and subsequent research has been generated on findings that heuristic principles and intuition lead to severe and systematic errors. Alternative views are that many decision-makers make diagnoses and provide solutions rapidly without being able to report how they attained the result, frequently with considerable accuracy. Intuition in the current study is defined as a non-conscious process of problem-solving through pattern recognition and higher-order reasoning, developed over time through tacit learning and experience, and expressed through both insight and feeling. I will argue that personality, perceptual and ability factors influence the use of both of the intuitive and analytical cognitive styles. I will, however, introduce arguments from both sides of the debate - rational versus non-rational models of decision-making.

My research program was aimed at Australian decision-makers in a high-risk industry, namely the financial markets. The model tested in this study incorporates various determinants of decision-making performance: level of experience; general personality traits such as affective and cognitive styles; perceived pressures on the decision-maker; emotional states experienced during the decision event; and cognitive style in use. The research comprised four studies designed to gain a better understanding of the nature of decision-making 'reality'. Ontologically, this is research on the existence and effect of intuition in decision-making in a naturalistic or 'realistic' setting. This research includes both qualitative and quantitative methods in a bid to capture as much detail as possible about this decision-making 'reality'.

Briefly, Study 1 was a collaborative project with another Ph.D. student to determine the relationship between intuition and emotions, using a number of measures widely used both in laboratories and in the field. Participants in the study were 448 undergraduate management students. We anticipated that the measures would prove to be reliable and valid measures which we could use further in our respective research programs, and that responses on the intuition scale would be moderately correlated with the emotion scales. Results showed, however, that the intuition measure (AIM) we used suffered reliability problems. A factor analysis produced two factors but these still did not improve the reliability substantially.

Study 2 was a pilot study to test the suitability of five measures of intuition, analysis and emotions to be used in a subsequent major study (Study 4). The measures used combined parts of measures developed by other authors, and adapted by me to make them suitable to a population of traders. Because an Australian Business School sample (n= 112) comprised undergraduate students with very little understanding of financial decision-making, it was possible only to test those measures which were of a general nature. It was found that the measures had acceptable reliability and structural qualities. Before I could progress to use in the field, however, it was necessary for me to validate the content of all measures with traders in the industry. This was achieved through Study 3.

Study 3 was designed to determine the usefulness and completeness of the variables included in the model as well as to test the validity of the measures prepared for the final study. Twenty-seven experienced traders participated in interviews using semi-structured questions; they were also observed and recorded as they made decisions about trading equities or futures. Four of these experts also provided detailed feedback on the relevance and completeness of the questionnaires. The transcripts were analysed using software called Leximancer®. The major finding of this study was that the expert traders used intuition about 35% of the time in their decision-making, while the remainder of their cognitions (65%) was of an analytical nature. They also indicated that they were aware of emotions such as stress and anxiety, which they wished to control within their decision-making.

My final study (Study 4) was web-based, and participants (n= 242) were asked to fill in 13 questionnaires, including three sets of decisions about which financial products (e.g., stocks, derivatives, or futures) they would buy. Those who completed at least five of the questionnaires were placed into a prize draw, and were offered an opportunity to receive a psychology of trading profile. In this study, I investigated the decision-making processes of financial market traders when they made predictions of market directions, with a focus on the role played by levels of expertise, their use of intuition and analysis, and the part emotion played in their decision-making. Measures were those adapted or devised and tested in Studies 2 and 3 particular to this population of financial market traders and decision makers. The traders were also asked to predict financial product prices (such as of equities or fixtures) for the next day, seven days from now, and 30 days from now. Results using correlation and hierarchical regression analyses showed that men and women were equally inaccurate in their predictions, and that females felt only marginally more stress than men. Older traders were no different from younger traders in terms of preference and use of analysis and intuition, although they saw the financial markets as more of an opportunity than a threat. Surprisingly, this research found that experts were less able to (or possibly less interested in being able to) predict financial product prices than novices. Possibly because of their risk management strategies, they also felt significantly lower levels of negative emotions such as stress and time pressure. Path analyses also revealed that intuition was more associated with negative emotions (such as stress, time pressure and seeing risk as threat), and that analysis was associated with positive affect (perceiving risk as opportunity, positive emotions, and confidence).

The thesis concludes with a discussion of decision-making in the high-risk financial markets industry, the role of emotions in high-risk decision events, and the nature of intuition. All of the variables in the model are discussed in light of the research findings as well as the relation of these findings to other previous and current research in the area of decision-making. A discussion of the limitations of the research program and suggestions for addressing these limitations are also included.

Keyword Stocks -- Decision making.
Investments -- Decision making.

Document type: Thesis
Collection: UQ Theses (RHD) - UQ staff and students only
Citation counts: Google Scholar Search Google Scholar
Created: Fri, 24 Aug 2007, 18:51:16 EST