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2.2 Regulatory Focus Theory

Behavioural finance takes into account the behaviour of investors, in particular their irrationality and biases, but fails to consider the association between one's moti- vation and the ways in which they achieve various goals. Since financial decisions, represented in this book by asset and portfolio allocation scenarios, are made to achieve goals that are distant in time, these choices are likely to be directed by the processes known as self-regulation (Zhou and Pham 2004). Self-regulation is defined as the process that individuals utilise to set their goals, pick means to accomplish these goals and assess progress toward the latter (Carver and Scheier 1998).

Regulatory focus theory states that self-regulation involves two differing sys-

tems, promotion and prevention (Higgins 2000). The promotion system, derived from the regulation of nurturance needs, relies on approach strategies whilstregu- lating toward desirable ends, whereas the prevention system, derived from the regulation of security needs, relies on avoidance strategies whilstregulating toward desirable ends. The promotion system is thus active under the pursuit of ideals, defined as the pursuit of wishes, dreams and aspirations, whilst the prevention system is active under the pursuit of 'oughts', defined as the fulfilment of responsibilities, obligations and duties (Higgins 2000).

Promotion self-regulation is concerned with approaching matches in a desired state, and prevention self-regulation is concerned with avoiding mismatches in a desired state (Florack et al. 2010). For example, to keep a slim figure, a promotion-focused individual would be more likely to exercise (approach a match), whereas a prevention-focused individual would be more likely to avoid eating fatty foods (avoid a mismatch) (Florack et al. 2010). In financial context, with goal being to maximise wealth, a promotion-focused individual would be more likely to invest in stock (approach risk), whilst a prevention-focused individual would be more likely to invest in a mutual fund (avoid risk) (Zhou and Pham 2004). Thus, pro- motion and prevention-focused individuals differ in their strategic inclinations when approaching a desired goal.

In order to comprehend regulatory focus theory, it is necessary to understand regulatory fit theory. Regulatory fit is defined as the increased motivation intensity that results when there is a match between the manner in which a person pursues a goal and their goal orientation (Aaker and Lee 2006). People experience regulatory fit when the manner of their engagement in an activity sustains, instead of dis- rupting, their current motivational orientation or interests (Higgins 2000). Fit makes people engage more strongly in what they are doing and feel right about it, and individuals can thus pursue the same goal with different orientations and ways (Higgins 2005), as highlighted in the preceding paragraph. Fit influences the strength of value experiences and perceived success (Freitas and Higgins 2002), independent of the pain or pleasure felt with such outcomes. Thus, when people pursue a goal that is in accordance with their orientation, they experience their engagement in that goal pursuit more strongly than if they were to pursue the goal at odds with their orientation, with regulatory fit making one feel right about their reactions to situations (Freitas and Higgins 2002). As such, poor regulatory fit or non-fit would result if the incorrect type or level of means is utilised, for example, vigilance avoidance means for goal pursuit in a promotion focus or low vigilance during goal pursuit in a prevention focus respectively (Higgins 2002). When a situation has a fit with one's regulatory focus, it is often viewed as being more right, regardless of one's mood or the manner of the situation (Camacho et al. 2003).

Chronic regulatory focus is the dominant regulatory focus of a person. Whilst both the promotion and prevention systems are perceived to coexist in every person, one or the other may be made temporarily more accessible (momentary regulatory focus) (Higgins 1998). Momentary regulatory focus is achieved by differing methods such as priming or framing. These are techniques used to make the pre- vention or promotion systems temporarily more dominant. The promotion system can be made momentarily more accessible by priming a person's ideals (Higgins et al. 1994; Pham and Avnet 2004), or by framing a task in an approach manner (Roney et al. 1995), while the prevention system can be made more accessible by priming a person's oughts, or by framing a task in an avoidance manner. Priming can be achieved by asking participants to describe how their current ideals or oughts changed as they grew up (Higgins et al. 1994; Liberman et al. 1999). For the promotion condition, participants could be asked to list down their current hopes and goals, and how they varied from those during their childhood. For the pre- vention condition, participants could be asked to write down their current duties and obligations, and how they differed from those during their childhood (Lin and Shen 2012). Framing is achieved by instructing participants to complete a paper-and-pencil maze, featuring a mouse with either a piece of cheese at the entrance or predatory owl looming over the maze (Friedman and Förster 2001). In the promotion condition, participants were instructed to guide the mouse to the cheese to seek nurturance, and in the prevention condition, to guide the mouse to safety, away from the owl.

People with a promotion focus tend to use eagerness as a means to accomplish promotion-focused outcomes, and those with a prevention focus use vigilance means to achieve prevention-focused outcomes (Higgins 2002). More specifically, those in an eagerness state from a promotion focus should want to achieve 'hits' and avoid errors of omission, and those in a state of vigilance from a prevention focus should want to accomplish correct rejections (Crowe and Higgins 1997), thus promotion is interested in gaining additions, and prevention is concerned in pre- venting subtractions (Roese et al. 1999).

Culture also plays a part, as the promotion system is more chronically accessible for people from individualist cultures, and the prevention system is more accessible for people from collectivist cultures (Lee et al. 2000). This is unsurprising as differences in how the self is defined, how relationships with others are imagined and what values are consistent within an individualism and collectivism framework (Oyserman and Lee 2008), and not less for chronic regulatory focus. Those with strong and accessible ideals, and those with strong and accessible oughts, have greater chronic access to their promotion and prevention systems, respectively (Higgins et al. 1986).

Compared to prevention-focused individuals, promotion-focused individuals tend to be more willing to accept new options and courses of action, more willing to take investment risks and more likely to rely on emotions and existing biases. Prevention-focused individuals tend to prefer status quo options and make invest- ments that are more conservative and are more disbelieving of manipulative per- suasion attempts (Kirmani and Zhu 2007). In general, promotion-focused individuals strive for matches to their goals, thus they are in a state of eagerness to include as many options as possible to achieve these goals. Preventionfocused individuals however, concentrate on avoiding mismatches to their goals, leading them to be in a state of vigilance, where they contemplate upon, more restrictively, only clearly apt choices (Zhu and Meyers-Levy 2007). Promotionfocused indi- viduals tend to maximise hits and reduce misses, prevention-focused individuals tend to maximise correct rejections and minimise false alarms. Promotion-focused individuals also emphasise speed over accuracy, with prevention-focused individ- uals doing the reverse (Pham and Chang 2010). Given its roots in one's motivation systems, regulatory focus has been applied to a large variety of domains. The paragraphs that follow illustrate how regulatory focus has explained behaviour across various fields.

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