Arvid O. I. Hoffmann

The impact of fraud prevention on bank-customer relationships: An empirical investigation in retail banking

Purpose – The purpose of this paper is to establish a conceptual as well as an empirical link between retail banks’ activities to protect their customers from third‐party fraud, the quality of customer relationships, and customer loyalty.Design/methodology/approach – A conceptual framework is developed linking customer familiarity with and knowledge about fraud prevention measures, relationship quality, and customer loyalty. To empirically test the conceptual framework, data were collected in collaboration with a large German retail bank.Findings – A positive association was found between customer familiarity with and knowledge about fraud prevention measures and the quality of customer relationships as measured by satisfaction, trust, and commitment. The quality of customer relationships, in turn, is positively associated with customer loyalty as measured by intentions to continue their relationship with and cross‐buy other products from their bank.Research limitations/implications – The paper focuses on...

How Investor Perceptions Drive Actual Trading and Risk-Taking Behavior

Recent work in behavioral finance showed how investors’ perceptions (i.e., return expectations, risk tolerance, and risk perception) affect hypothetical trading and risk-taking behavior. However, are such perceptions also capable of explaining actual trading and risk-taking behavior? To answer this question, we combine monthly survey data with matching brokerage records to construct a panel data set allowing us to simultaneously examine investor perceptions and behavior. We find that investor perceptions and changes therein are important drivers of actual trading and risk-taking behavior: Investors with higher levels of and upward revisions of return expectations are more likely to trade, have higher turnover, trade larger amounts per transaction, and are more likely to use derivatives. Investors with higher levels of and upward revisions in risk tolerance are more likely to trade, have higher buy-sell ratios, use limit orders more frequently, and hold riskier portfolios. Investors with higher levels of risk perception are more likely to trade, have higher turnover, have lower buy-sell ratios, and hold riskier portfolios.

Behavioral Portfolio Analysis of Individual Investors

Existing studies on individual investors’ decision-making often rely on observable socio-demographic variables to proxy for underlying psychological processes that drive investment choices. Doing so implicitly ignores the latent heterogeneity amongst investors in terms of their preferences and beliefs that form the underlying drivers of their behavior. To gain a better understanding of the relations among individual investors’ decision-making, the processes leading to these decisions, and investment performance, this paper analyzes how systematic differences in investors’ investment objectives and strategies impact the portfolios they select and the returns they earn. Based on recent findings from behavioral finance we develop hypotheses which are tested using a combination of transaction and survey data involving a large sample of online brokerage clients. In line with our expectations, we find that investors driven by objectives related to speculation have higher aspirations and turnover, take more risk, judge themselves to be more advanced, and underperform relative to investors driven by the need to build a financial buffer or save for retirement. Somewhat to our surprise, we find that investors who rely on fundamental analysis have higher aspirations and turnover, take more risks, are more overconfident, and outperform investors who rely on technical analysis. Our findings provide support for the behavioral approach to portfolio theory and shed new light on the traditional approach to portfolio theory.

The Role of Educational Diversity in Investor Relations

This paper shows the role of educational diversity on investor relations quality and the impact of the latter on the number of shareholder activism incidents a firm encounters. We review literature on marketing, finance, and corporate communications to develop a conceptual framework which we test using a combination of secondary data and primary data collected through a survey and interviews amongst investor relations professionals. The empirical results support the conceptual framework, showing higher investor relations quality levels and lower shareholder activism intensity for companies with educational diverse investor relations teams. In particular the presence of marketing and communication experts in investor relations teams contributes to higher investor relations quality and reduced shareholder activism.

Behavioral Aspects of Covered Call Writing: An Empirical Investigation

Various explanations for the popularity of covered call option strategies have been explored in the literature. According to Shefrin and Statman [1993], framing and risk aversion can help justify its attractiveness to investors. Applying prospect theory and hedonic framing, these authors predict that in a world of frame dependence an investor that is sufficiently risk averse in the domain of gains will prefer a covered call position over a stock only position and that certain covered call designs will be preferred despite identical cash flows. To date, the relationship among framing, risk aversion, and covered call writing has not been empirically tested. We gather empirical evidence to complete this gap in the literature. We find highly significant empirical evidence for a pronounced framing effect with respect to different covered call designs with equal net cash flows as well as covered calls in general. We find only scarce empirical evidence for a relationship between risk aversion in the domain of gains and a preference for covered calls. In order to observe a positive relationship between risk aversion and covered call writing, investors with above average risk aversion seem to be required.

Focal versus Background Goals in Consumer Financial Decision-Making: Trading Off Financial Returns for Self-Expression?

According to standard (rational) models of (financial) decision-making, consumers should generally have a single strong, normative focal goal when making financial decisions like selecting which stocks to invest in: to maximize risk-adjusted financial returns. Nevertheless, consumers’ financial decisions may also be influenced by other goals that operate in the background, such as the desire to express themselves. The present research examines the interplay between focal and background goals in consumer financial decision-making and identifies several conditions that lead individuals to trade off financial returns for the satisfaction of background goals. Three experiments show that individuals who have (1) been subtly primed with self-expressive background goals, or (2) experienced progress towards the focal goal of financial returns, are willing to accept lower financial returns for the opportunity to invest in stocks that allow for increased self-expression. Further, while subtly primed background goals exert a non-normative influence on investment decisions, (3) explicit cues about an investment’s background goal-instrumentality create a backlash effect, and decrease individuals’ willingness to trade off financial returns.

How experiences with trading a company’s stock influence customer attitudes and purchasing behavior

Purpose – The purpose of this paper is to investigate the potential spill-over effects from negative (and positive) experiences with trading a company’s stock on shareowner-customers’ emotions and subsequent customer attitudes and behavior. Design/methodology/approach – A conceptual framework that links selling a stock for a loss (or gain), emotions, and customer attitudes and behaviors is developed. The framework is tested with data from a sample of Dutch investors that is analyzed with structural equation modeling through the partial least squares method in SmartPLS. Findings – Selling a stock for a loss vs selling a stock for a gain have different effects on shareowner-customers’ attitudes and behavior toward the company. Losses induce negative emotions which in turn result in lower satisfaction and behavioral loyalty as well as in increased propensity to complain about the company. Investment gains, however, result in more positive emotions which then lead to increased preference of the company whose ...

The High Cost of Technical Analysis and Speculation

We compare transaction record information and survey data of a sample of U.S. full-fee brokerage clients for the 1964-1970 period to those of a similar sample of Dutch discount brokerage clients for the 2000-2006 period. Two striking findings from this comparison pertain to technical analysis. First, investors in the more recent data report using technical analysis five times more frequently than investors in the older data. Second, using technical analysis is very costly: We estimate the monthly cost of using technical analysis to be 60 basis points. Paralleling these results is our finding that investors report having speculation as a primary investment objective 75 percent more often in the recent data than in the older data. The marginal impact of reporting to have speculation as a primary investment objective is to increase the monthly return standard deviation by 180 basis points, with no statistically significant impact on net returns. In line with studies using the older data, we find that technical analysis and speculation are primary drivers of excessive trading and that excessive trading impairs investor performance. In contrast to the existing behavioral finance literature, however, we find only weak evidence for the claim that overconfidence is a primary driver of turnover and investor performance.

Online Investors: What They Want, What They Do, and How Their Portfolios Perform

For 5,500 individual online investors we match survey records with recent trading data to investigate what they want, in terms of their stated objectives for investing, what they do, in terms of the broad investing strategies they employ, and how their portfolios perform in terms of risk, return, turnover, and diversification. Our results show that speculation is an important investment objective, and is related to a higher turnover of stocks and derivatives, as well as riskier returns. In contrast, while the proportion of individual online investors saving for retirement is relatively low, those who do have this as their objective display a lower turnover of stocks and hold less concentrated portfolios. Individual online investors rely strongly on technical analysis as an investing strategy, which goes hand in hand with a higher turnover of stocks and derivatives, more concentrated portfolios, lower returns, and higher risk. Finally, a large fraction of the individual online investors in our sample rely on their intuition as an investing strategy, which is associated with a higher turnover of stocks.

Wall Street Crosses Memory Lane: How Witnessed Returns Affect Professionals' Expected Returns

Witnessing stock-market history in the making creates a vivid story, but does not provide valuable information. However, finance professionals extrapolate from personally witnessed returns, which we show by using a unique dataset about the timing of their career start in the finance industry. This result is robust when controlling for all publicly available information and other time-fixed effects as well as interpersonal differences. Additionally, we find that returns witnessed early in the career are more formative than those witnessed recently. Finally, among the potential channels through which witnessed returns might affect expected returns, a judgmental bias appears most plausible.