COUNTERFACTUALS IN FINANCIAL DECISION-MAKING

The experiment reported here tested hypotheses derived from Norm Theory (Kahneman and Miller 1986) in the realistic domain Of futures trading. Results support the literature on expectancy and attributional judgment. Outcomes which are judged as unexpected lead investors to construct counterfactuals involving improvements in their past actions more so than counterfactuals eliminating adverse aspects of the market. Subjects were more likely to create counterfactuals by altering effects than by varying causes, and by altering exceptional rather than routine elements in scenarios. Theoretical and practical implications for financial decision making are discussed. We evaluate the effect of variable mutability on market feedback, post-decision processing and learning for future decisions, and the problem of escalating commitment.