Is the investor's reliance on cognition and emotional regulation predict preference for selecting value versus growth stocks?

Fawad Ahmad and Raffaele Oriani

The European Journal of Finance, 2023, vol. 29, issue 13, 1555-1578

Abstract: Economic behavior highlights the importance of differences in individual characteristics like cognition and emotional regulation strategy in predicting the selection and performance of economic choices. However, the literature on value premium has overlooked the effect of cognition and emotional regulation strategy in assessing individual preference to select value versus growth stocks. We fill this gap by employing dual-process and emotional regulation theories to investigate the impact of intuitive cognition (Type 1), analytical cognition (Type 2), expressive suppression, and cognitive reappraisal on individual preferences for the selection of value versus growth stocks. Results confirm that individuals with higher reliance on Type 1 (or Type 2) and expressive suppression (or cognitive reappraisal) exhibit lower (or higher) preferences for the selection of value versus growth stocks. These results imply that emotion alters an individual's decision-making, and both emotion and cognition are inherently intertwined from inception to action. Our findings have implications for investors to avoid (or seek) investment in emotion-driven fundamentally weak overvalued firms (or fundamentally strong undervalued firms) via regulating emotional inhibitors to engage in thorough decision-making.

Date: 2023
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DOI: 10.1080/1351847X.2022.2086478

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