Prevention focus and prior investment failure in financial decision making

This research demonstrates, across four experiments, that investors behave differently when a prior investment is perceived as a failure rather than as a loss. The research shows that individuals consistently prefer a conservative investment option in the condition of failure rather than a loss even though the risky option offers a chance to break even (Study 1 & 2). The same result was obtained even when the risky option offers a higher expected return (i.e. should be selected if the decision makers are rational) than the conservative option (Study 3). The tendency to be more risk-averse in the failure condition is due to the activation of situational prevention focus (Study 4). The research findings highlight the importance of understanding investors’ perceptions of their prior negative investment decision outcomes since risk-seeking behavior and buying behavior could be different when a prior investment is perceived as a failure or as a loss.