Recent Experience and Financial Decision Making: The Role of Regulatory Focus and Regulatory Closure

2017-02-20T04:48:08Z (GMT) by Ewe Soo Yeong
While the findings from previous studies have provided evidence that prior outcome is a crucial determinant in influencing decision makers’ subsequent risky choice, little attention has been directed to understand how subsequent risky choice is affected by recent experience associated with an individual’s self-regulation system, which is termed regulatory closure. This study draws on Regulatory Focus Theory and Prospect Theory to investigate the impact of regulatory closure on risk-seeking behaviour in subsequent financial decision making. The study proposes that risk-seeking behaviour varies after a successful closure through the process of mental accounting and is moderated by the intensity of an individual’s chronic regulatory focus. In addition, the study demonstrates that an unsuccessful closure triggers an activation of the prevention system that induces loss aversion and this temporary state of prevention focus influences subsequent unrelated decisions and judgment.
   The present study used a between-subjects experimental approach with the participation of more than 600 individuals over four studies. The first two studies examine the impact of regulatory closure and the moderating role of intensity of chronic regulatory focus on risk-seeking behaviour in subsequent similar and different type of financial decision making. Study 3 provides more direct evidence to support the proposition that mental accounting is the underlying mechanism which affects risk seeking behaviour after a successful closure. Study 4 provides stronger evidence to support the proposition relating to the activation of the prevention system after an unsuccessful closure.
   Overall, the results show that after a successful closure, individuals with different degree of intensity of chronic regulatory focus exhibit asymmetric risk-seeking behaviour in different decision contexts due to their different way of mental accounting. Upon an unsuccessful closure, individuals’ prevention system is activated and this activation induces loss aversion in subsequent financial decisions and higher preference on products with more-prevention-focused features in non-financial contexts. The present research contributes useful insights relating to the relationship between regulatory focus, regulatory closure, mental accounting, and the intensity of CRF in investment decisions. These findings also have important implications for financial markets and consumer financial service industry.