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Chapter 3 Theoretical Framework

Abstract

This chapter begins with the development of the hypotheses, which regard the relationship between chronic regulatory focus with asset (H1) and portfolio (H2) allocation. The dependent variable (asset and portfolio allocation), independent variable (chronic regulatory focus) and the control variables (gender, age group, ethnicity, marital status, education and financial literacy) will then be reviewed. The means of measurement for these variables will then conclude the chapter.

3.1 Statement of Hypotheses

Research indicates that primed states of promotion and prevention are associated with certain assets (Zhou and Pham 2004). As primed states of regulatory focus are associated with certain assets, i.e. stock are associated with the promotion focus, and mutual funds are associated with the prevention focus, it is hypothesised that chronic regulatory focus is associated with the same assets:

H1: Chronic regulatory focus affects asset allocation decisions; promotion and prevention-focused participants will choose promotion and prevention-based assets respectively.

Although individuals may have preferences for and varying levels of familiarity with different assets, they would generally possess a portfolio of some form. This portfolio may include real estate, bonds and various other assets. A portfolio would thus represent most of the financial allocation decisions one would make, it buying an investment property or purchasing a bond. In order to accurately capture all forms of financial allocation decisions, both the asset and the portfolio are necessary.

The portfolios in this book have their own risk/return profile and are proposed to be associated with states of promotion and prevention. Portfolio allocation is more directly reflective of the regulatory focus concept of 'promotion being interested in gaining additions, and prevention concerned with preventing subtractions' (Roese et al. 1999), than when compared to account allocation scenarios in previous research (Zhou and Pham 2004). Two portfolios have been provided for this book, one reflective of the promotion focus, and one reflective of the prevention focus, elaborated upon in Sect. 4.3.2.

Portfolios that gain in value over time, but may also lose value, and portfolios that maintain their value, accounting for inflation are proposed to be reflective of states of promotion and prevention respectively. Compared to asset allocation decisions, portfolios capture more of the day-to-day financial allocation decisions undertaken by consumers. A more realistic reflection of financial allocation deci- sions is necessary for effective policy-making, thus leading to the hypothesis:

H2: Chronic regulatory focus affects portfolio allocation decisions; promotion and prevention-focused participants will choose promotion and prevention-based portfolios respectively.

As per the results section, it is observed that both hypotheses are supported. This forms the crux of the study and will be illustrated further in the discussion. The validity of both hypotheses will be tested by the eye tracker and self-report. These, along with the variables of the study will be explained in detail in the following sections.

3.1.1 Further Hypotheses

It is known that gender (Powell and Ansic 1997), age (Chen and Sun 2003) and education (Cole et al. 2012) have an effect on financial decision-making. Given that financial decision-making is related to regulatory focus, it is possible that these variables are associated with gender, age and education. Thus, their relationship will be examined in the following additional hypotheses:

Hα: Gender is associated with regulatory focus and asset and portfolio decisions. Hβ: Age is associated with regulatory focus and asset and portfolio decisions. Hγ: Education is associated with regulatory focus and asset and portfolio

decisions.

As elaborated upon in the next section, these variables will also be used as control variables in exploring the main hypotheses.


 
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