Group Polarization Under Framing Effects In Investment Decision

Investment decision is a very common and important decision in everyday life. Many financial anomalies have revealed the limitation of traditional finance. Therefore, behavioral finance, which incorporates the research results of behavior and psychology disciplines, has gained more and more attention.One big difference between traditional finance and behavioral finance is that traditional finance assumes that people is rational, while behavioral finance believes that psychological factors of investors will influence decision outcomes. There are many cognitive biases observed in investors'decision making, one of them is named "framing effects" by Tversky and Kahneman(1981). Framing effects mean that different ways of describing the same information will affect the decision maker's perception of a problem or choice, and ultimately the decision maker's preference. It will result in a preference for risk-averse choice in gain situations and risk-seeking choice in loss situations. Therefore, investors may make wrong decisions due to framing effects caused by the description of investment information.In reality, institutional investors such as fund companies play a very important role in investment decisions, while the research of group investment decision-making seems a little behind. Apart from individual biases, group decision making will also be influenced by those group-specific irrational factors. One of them is group polarization. In group polarization situations, groups show a pronounced tendency to shift toward more extreme decisions from their initial positions. If the initial views of individual are biased, group will make it worse. When it comes to framing effects in investment decisions, due to group polarization, group decisions in gain situations may appear to be more cautious than individual decisions, whereas group decisions in loss situations may appear to be more risky than individual decisions.An experimental method is used to examine whether framing effects are more prominent in group decision making as a result of the group polarization effect. Findings indicate that framing effects occur in both individual and group decision making, and are more prominent in group decision though group polarization. In other words, group polarization amplifies the framing bias. Therefore, investors should be aware of these irrational factors and try not to fall into the decision-making errors. Individual investors should be alert to the misleading presentation of investment information, while decision groups such as institutional investors should pay additional attention to the group polarization effect. Finally, the article summarizes the limitations of this study, and makes some suggestions for future study.