How do investors make predictions? Insights from analogical reasoning research
✍ Scribed by Jennifer Gregan-Paxton; Jane Cote
- Book ID
- 101347621
- Publisher
- John Wiley and Sons
- Year
- 2000
- Tongue
- English
- Weight
- 190 KB
- Volume
- 13
- Category
- Article
- ISSN
- 0894-3257
No coin nor oath required. For personal study only.
✦ Synopsis
Previous work on investor decision making has focused almost exclusively on information speci®c to the company being judged. Consequently, every decision is viewed as a novel event, disconnected from the investor's existing knowledge. In this study, the analogical reasoning literature provides the theoretical support for arguing that investors frequently utilize existing knowledge as a basis for generating predictions about a company's future. The speci®c proposal is that investors transfer their existing knowledge via two dierent forms of analogical reasoning. The ®rst, relational reasoning, is based primarily on structural correspondence between a novel company and an existing schema. The second, literal similarity reasoning, is based primarily on surface correspondence of a novel company and a previously encountered company. Our theoretical framework is tested in a study in which experienced investors predict the outcome of a novel company's strategy after reading about the experiences of other companies who implemented a similar strategy. The results are consistent with the occurrence of both relational and literal similarity reasoning, with relational reasoning emerging as the dominant approach to generating investors' predictions.