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How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?

McCombs School of Business, University of Texas at Austin, Austin, Texas 78712
Kellstadt Graduate School of Business, DePaul University, Chicago, Illinois 60604
akumar{at}mail.utexas.edu
slim1{at}depaul.edu

This study examines whether the framing mode (narrow versus broad) influences the stock investment decisions of individual investors. Motivated by the experimental evidence, which suggests that separate decisions are more likely to be narrowly framed than simultaneous decisions, we propose trade clustering as a proxy for narrow framing. Using this framing proxy, we show that investors who execute more clustered trades exhibit weaker disposition effects and hold better-diversified portfolios. We also find that the degree of trade clustering is related to investors' stock preferences and portfolio returns. Collectively, the evidence indicates that the choice of decision frames is likely to be an important determinant of investment decisions.

Key Words: narrow framing; trade clustering; disposition effect; portfolio diversification; prospect theory
History: Received: September 14, 2006;

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