Investor decisions under conditions of uncertainty: The influence of firm-specific information on traders' behaviors in the absence of pre- and post-announcement drift

The idea that investors act in their own best interests is a cherished notion. Investor rationality is an underlying feature of economic and finance theory. However, over time the concept of rational action has been susceptible to change. Moreover the trend has been for theoreticians to move in the direction of a less than strict adherence to assumptions of perfect rationality in-so-far as Traders' behaviors are concerned. Perfect rationality was an idea expressed by Adam Smith in his book Wealth of Nations (Smith, 1776); in the last century we were exposed to the more moderate assumptions of Simon involving "optimization" (Simon, 1955, p. 102) and recently we are informed by the current concepts of "Heuristic-Driven Bias" and "Frame Dependence" as explained by Shefrin and other researchers (Shefrin 2002, pp. 13--32).; The desire to test and examine the idea that Traders are to some extent rational in their decisions and actions is one of the major motivations behind this and many other research projects that deal with Firm Specific Information (FSI) and Trader behavior.; In this study, news releases regarding specific examples of FSI are used in a quasi experiment to test Trader behavior. These news releases are referred to as Firm Specific News (FSN). This study addresses 3 questions: (1) Is the aggregate impact of FSN on Traders' behaviors "rational" with respect to price? (2) Do individual Traders act rationally when confronted with FSN? (3) Is there evidence of irrational behavior with respect to the actions Traders take?; This study answers these questions by conducting a quasi-experiment (a trading simulation) to test the trading behavior of men (and women) who are professionally trained and practicing specialists at trading securities upon which FSN is available. The research provides a new type of test of the value and impact of FSN as measured by traders' behaviors.; While similar to the event studies of the past this research represents a step forward over those prior studies because of several new design and methodological features. Specifically: (4) FSN that was pre-selected via an expert survey as being relevant to the specific Control Securities was used as independent variables. (5) A quasi-experiment was conducted in such a way so as to make use of a particular type of fixed income security that trades actively in the public market but without the benefit of any publicly available FSN. (6) Professional traders with similar education, industry registration and training, as well as similar practical experience were employed to act as trading "specialists".; The study is similar to the event studies of the past but that is more accurate and informative. In designing and implementing the study I controlled for: (i) Pre and post announcement drift, (ii) The joint hypothesis problem, and (iii) Eleven other variables that have complicated previous event studies.; The results of the study reveal that: (1) There is indeed a positive correlation between the qualitative level of FSN (something I refer to as "News Level") and Traders' behaviors as they impact security prices. (2) Traders are not always rational in their trading actions (selling, buying or holding). (3) Traders are susceptible to Heuristic-Driven Bias and Frame Dependency. (4) Finally, the results identify a previously unobserved form of Frame Dependency that I call Positive Prospective Preference.