An Experimental Study of Influences of Performance-Related Payments on Timing of Delegated Stock Purchases. Issue 1 (2nd January 2017)

• Record Type: Journal Article
• Authors: Gärling, Tommy; Andersson, Maria; Hedesström, Martin; Biel, Anders
• Is Part Of: Journal of behavioral finance. Volume 18:Issue 1(2017)
• Page Start: 78
• Page End: 85
• Publication Date: 2017-01-02
• Subjects: Stock purchase -- Bonus -- Bounded rationality -- Heuristic judgement -- Hyperbolic time discounting; Capital market -- Psychological aspects -- Periodicals; Finance -- Psychological aspects -- Periodicals; 332.019
• DOI: 10.1080/15427560.2017.1276065
• Languages: English
• ISSNs: 1542-7560

Abstract

ABSTRACT: Performance-related bonuses are important tools for investment organizations to incentivize stock traders. Yet, two experiments indicate that bonuses rewarding short-term performance may lead to worse timing of purchases. The authors propose that hyperbolic time discounting makes participants set lower aspired purchase prices for short-term (decreasing percentage) bonuses than for long-term (increasing percentage) bonuses. For this reason purchases are made earlier for decreasing than increasing percentage bonuses, earlier for decreasing than random prices, and earlier for high price volatility than for low price volatility. Neither purchases at the lowest price or highest bonus are attained. Hyperbolic time discounting may account for bubbles observed in experimental double-auction markets.