Handbook of Financial Decision Making

Written by Gilles Hilary, Houston Professor of Accounting and David McLean, William G. Droms Professor of Finance, McDonough School of Business, Georgetown University, US

Financial decision making is an increasingly complex subject. To be exhaustive is beyond the reach of any handbook, so we aim to offer an entry point for those interested in this topic. The chapter authors are leading researchers who summarize the state of the art in their respective areas of expertise and offer projections of what is yet to come. The chapters in this handbook cover a wide range of topics spanning both traditional fields, such as regulation and the role of analysts, and emerging fields, such as artificial intelligence, neurofinance, and robo-advising. This handbook is organized into three sections.

Section I: Natural and Environmental Factors

1. Limited Attention: Investor inattention leads to market inefficiencies and delayed price responses. Alex Nekrasov, Siew Hong Teoh, and Sijia Wu discuss how this impacts retail and institutional investors, with firms adopting disclosure strategies accordingly.
2. Seasonal Affective Disorder (SAD): Seasonal Affective Disorder influences financial markets. Mark Kamstra and Lisa Kramer’s research shows that investors demand higher risk premiums during seasons with less daylight, affecting stock market indices and U.S. Treasury bonds.
3. Preference for Lottery-Like Securities: Turan Bali and Quan Wen examine investor preferences for lottery-like securities, resulting in overvaluation and lower returns.
4. Neurofinance: Elise Payzan introduces neurofinance, combining neuroscience with financial decision-making, to enhance the communication of financial information and improve decision-making.
5. Corporate Culture: Corporate culture influences firm productivity variations. Jillian Green and Kai Li explore measurement techniques and the impact of technology on corporate culture.
6. Geographic Preference: Qinghai Wang discusses how geographic preference influences financial decisions, highlighting local investors’ advantages and market frictions stemming from geographic disparities.
7. Language in Financial Disclosures: Natasha Bernhardt, Mandy Ellison, Kristina Rennekamp, and Brian White investigate how linguistic choices in financial disclosures impact decisions.
8. Social Finance: Byoung-Hyoun Hwang explores the impact of social interactions on investment decisions and asset prices, noting that word of mouth doesn’t necessarily lead to better decision-making.
9. Financial Media: Kenneth Ahern and Joel Peress categorize media activities and discuss their overall positive impact on financial decision-making, enhancing market efficiency.

Section II: Institutions, Frameworks, and Tools

1. Disclosure Regulation: S.P. Kothari, Liandong Zhang, and Luo Zuo emphasize the importance of timely and accurate financial information disclosure for efficient resource allocation. They also touch on the ongoing ESG disclosure and regulation debate.
2. Role of Auditors: Robert Knechel and Edward Thomas discuss auditors’ crucial role as enforcers of financial regulation, ensuring market integrity, and addressing issues related to independence and collaboration.
3. Financial Reporting and Asset Pricing: Steven Monahan explores how financial reporting optimizes asset pricing, aiming to enhance investment decisions through pricing models and financial information.
4. Management Control Systems: Satish Joshi and Ranjani Krishnan discuss management control systems from the perspective of internal users of financial information, addressing behavioral theories and emerging issues.
5. Socially Responsible Investment (SRI): Hao Liang and Tran Bao Phuong Nguyen delve into the contemporary importance of SRI, highlighting the ongoing debates regarding financial payoffs associated with SRI.
6. Artificial Intelligence (AI): Allen Huang and Haifeng You explore AI’s potential to enhance financial decision-making through machine learning algorithms that extract and aggregate data, improving overall outcomes.
7. Robo-Advising: Francesco D’Acunto and Alberto Rossi focus on the impact of information technology in transforming consumer financial decision-making through robo-advising, presenting case studies and research opportunities.

Section III: Settings and Decision Making

1. Financial Analysts: Daniel Bradley’s chapter delves into sell-side analyst research companies, highlighting their significance in finance and accounting literature. He notes over 2,500 articles in top journals mention analysts. Bradley discusses the competitive threats analysts face and their responses.
2. Household Financial Decision Making: Sumit Agarwal and Nithin Mannil’s chapter explores household finance, covering consumption, savings, borrowing, investment, and fintech from the perspective of individuals or households. They link these decisions to information constraints, behavioral aspects, and social dimensions.
3. Behavioral Finance and Retirement Planning: Julie Agnew’s chapter focuses on individual retirement decision making, which is crucial in countries with aging populations. She summarizes financial choices in both the pre-retirement accumulation and post-retirement “decumulation” phases, emphasizing the impact of behavioral biases and targeted interventions on decision quality.

Handbook of Financial Decision Making
Edited by Gilles Hilary, Houston Professor of Accounting and David McLean, William G. Droms Professor of Finance, McDonough School of Business, Georgetown University, US is available now.

Read the introduction and other free chapters on Elgaronline.