Consumers' information search when making investment decisions (2002)

Abstract We discuss the characteristics of investment decisions and identify the factors that affect consumers' information search behavior when they make investment decisions. Using the 2000 to 2001 MacroMonitor data set, we find that subjective knowledge, amount of investment, risk tolerance, age, education, and income influence both the extent of information search and the use of specific information sources, including literature, media, the Internet, friends/family, and professional services. © 2004 Academy of Financial Services. All rights reserved. JEL classification: D83; E21 Keywords: Information search; Information sources; Investment; Financial services 1. Introduction The investment service industry has experienced phenomenal growth over the past decade. In 1992, there were 17,787 securities brokerages, dealers and flotation companies. The number of establishments increased 37.4% to 24,431 by the end of 1997, and annual sales increased from $14,806 million to $52,941 million during the same period (U.S. Census Bureau, 1997). Accordingly, there has been an increasing demand for investment information from consumers who are potential investors. Information plays an essential role in any purchasing decision, including the choice of investment products. Investment products have several distinct characteristics. First, they are intangible goods.1 Investments are classified as goods, because they have value and exist independently of producers and buyers, ownership belongs to the investors who purchase them, and they can be further traded at different times and locations. Investment products are intangible, because their value is the invisible right of ownership of the subsequent benefits. Second, investors have to predict the unknown realization of market outcomes at the time of purchase (Strassl, 1986). The performance of investment products depends on the performance of the parties who produce the products, for example, the company who issues the stocks, which is further affected by micro- as well as macro-economic factors. When making investment decisions investors evaluate the predicted investment income and losses, both of which can only be realized when the return or loss actually takes place. By searching for information, consumers may find products with greater benefits per dollar spent, increase satisfaction with the products and/or the decisions (Bettman, 1979; Punj and Staelin, 1983), and/or reduce risk (Bennett and Harrell, 1975). Consumers tend to engage in more extensive search activities when purchasing products that are more expensive or carry more risk (Beatty and Smith, 1987; Capon and Burke, 1980; Cunningham, 1967; Moore and Lehmann, 1980; Srinivasan, 1987). Investment generally involves substantial amount of money and risk, and information search is therefore an important activity for many consumers before making investment decisions. Even though numerous studies have investigated consumer information search behavior, consumer information search for investment decisions have not received much attention. In this study, we propose to contribute to this aspect of the literature. Using data from the 2000 to 2001 MacroMonitor Survey, a comprehensive database of consumer attitudes, behaviors and motivations associated with financial products, we empirically investigate the determinants of consumers' information search behavior when making investment decisions. 2. Literature review Stigler (1961) proposes the theory of imperfect market information in his seminal article on the economics of information. Since then, consumers' information search behavior has been explained in terms of the costs and benefits associated with a search. Grossman and Stiglitz (1980) have also noted that there does not exist a competitive equilibrium. Prices serve a role in conveying the information from the informed individuals to uninformed ones but only partially reveal the information about the true value of the assets because information is costly. …