THE EFFECT OF COGNITIVE STYLE ON REINVESTING GAINS IN PERSONAL FINANCE DECISION-MAKING

Abstract

Consumer behaviour research has demonstrated that an individual’s cognitive style can affect their mental accounting in consumer purchases. The goal of this dissertation is to investigate whether this effect can explain investor behaviour in portfolio formulation, specifically in relation to diversification strategies. To investigate this problem, I use a quasi-experiment to test the effect of cognitive style on the reinvestment of gains in personal finance decision making and, examines whether the effect will differ between analytic and holistic thinkers. Additionally, consumer behaviour research suggests that the effect may be moderated in utilitarian consumption when compared to hedonic instances. Since the nature of investment has rarely been studied as utilitarian or hedonic and empirical testing has not been conducted, the Hedonic and Utilitarian Dimensions of Consumer Attitude (HED/UT) scale is used to assess the hedonic and utilitarian nature of investments against six real world investments. The results of this experiment provide empirical evidence that analytic thinkers are more likely to reinvest gains from one investment into similar investments, especially in instances where the nature of the investment is utilitarian. The effect is more prominent in Caucasians and risk-averse investors. This work provides far ranging implications for theoretical insight and practical matters in decision making, customer service, and protecting consumers. These theoretical advances include empirical evidence of investor behaviour under uncertainty and a proposed platform for comparing investments to purchases in the consumer behaviour context. In practice, this information can be used in the financial services sector by individual investors and money managers to help develop training tools that support portfolio diversification. Highlighting this unconscious bias will help strengthen the average investor’s portfolio by optimizing returns and reducing volatility from market risk.