From rational minds to herding hearts: the impact of stock performance transparency on risk preference

This research examines how performance transparency affects individual sideways shifting of risk preferences within rational assessment and herding frameworks. In three conditions (no disclosure, peer choice visibility, and peer earnings visibility), participants in some control experiments took turns making investment decisions under the three conditions as described. The hypothesis was confirmed, whereby the disclosure of choices and the earnings report in some scenario played a part in determining transparency in relation to conformity and complete rational reassessment. Diversification of behavior manifested in fully rational reassessment and rational diversification of behavior. Different stages of the experiments reflected changes in the risk tolerance in a statistically significant way, and the risk disclosure was the most powerful mechanism to effect change. Individual risk tolerance was the strongest determinant of the extent of imitation, herding behavior in risk-averse participants, while risk-seeking behavior was associated with autonomy. Recurrent feedback responses, cascades, and their reversal refine the Informational Cascade Theory. The junction of reference-dependent framing and transparency adds to Prospect Theory. Analytical reasoning, social influence, and Rational Thinking Theory coincide as social influence was shown to be mitigated by rational thinking. In general, performance transparency is a double-edged sword; with context and framing around the risk, it can trigger imitation or rational independence.