Customer satisfaction and reduction of investment risk – Is there a link?


Wissenschaftlicher Aufsatz, 2011
13 Seiten

Leseprobe

Table of Contents

1. Introduction – Investment risk and customer satisfaction: an not all too obvious relationship

2. Risk and perceived risk

3. Customer satisfaction

4. The missing link: customer satisfaction and perceived risk or purchase

5. Conclusion: About risk, investment and customer satisfaction

6. References

1. Introduction – Investment risk and customer satisfaction: an not all too obvious relationship

It is assumed that investors calculate the risk of their investments[1]. It is further assumed that investors base their investment decision on sound information.[2] Finally, it is assumed that investors diversify the risk of their investments by building investment portfolios.[3] It is the classical economic theory that makes these assumptions. Classical economic theory is inhabited by rational actors and efficient markets and by Equilibria of various kinds that are always established between supply and demand.[4] However, past decades have witnessed an erosion of the rational actor model, mainly because actors did not appear to behave as predicted by classic economic models. Soon after ruptures emerged in the surface of classical theory, theoretical arbitrageurs started to use these ruptures to their own advantage. They introduced ideas of bounded rationality,[5] ideas of actors depending more on situations than on sound reasoning[6] and ideas of a variety of variables influencing actors decision-making process.[7] With respect to investment decisions an entirely new branch of research and theoretical modelling emerged: behavioural economics.[8] Behavioural economics are based on the assumption that differences between predictions of actors’ decisions derived from the classical model and actual behaviour are too big, too systematic, and too widespread to be neglected.[9] The new wind in economics and finance stresses situational factors for investment decisions in general and perceptions of risk in particular.[10] Accordingly, risk is no longer an objective characteristic of investment decisions that can be calculated, but risk is a manifold entity that consists of a diverse range of elements depending of actors’ perception of situational variables.[11] All these elements have one thing in common, they share a propensity providing risk-relief to actors. Accordingly, anything able to reduce risk in the eyes of (a rational) investors will be added to the portfolio of risk reduction measures. It is the objective of this short paper to examine the potential of customer satisfaction as a means to reduce risk. Quite obviously, customer satisfaction can lessen the burden of investment risk in two ways, by either being a matter of personal experience or by providing overall information about investment risks. For both forms of customer satisfactions their respective role in an investors investment-decision portfolio will be evaluated on theoretical grounds. Therefore it is necessary to discuss risk and perceived risk. Moreover, it is necessary to provide a workable definition of customer satisfaction. Finally, it is necessary to provide the missing link between (perceived) risk, customer satisfaction and investment decisions.

2. Risk and perceived risk

Obviously, risk is all around us, it is an essential ingredient of life or as McDaniels and Small put it: “Being alive means seeking opportunities and taking risks”.[12] Risk, as Cohrssen and Covello put it “is technically defined as the possibility of suffering harm from hazard”.[13] Risk originates of negative consequences of decisions or actions taken. Accordingly, risk “means the probability that a particular adverse outcome occurs during a given quantum of exposure to hazard”.[14] Defining risk as a probability allows for risk assessment and risk calculation. One method to do so, has been proposed by Harry Markowitz in his famous portfolio-theory.[15] However, calculation of risk relies on past experience and past experience, while it provides a clue about future expectations does not guarantee a certain development or outcome. Hence, there is a distinct difference between a calculable risk and the uncertainty that nevertheless surrounds the materialization of the respective risk: “The practical differences between the two categories, risk and uncertainty, is that in the former the distribution of the outcome in a group of instances is known (either through calculation a priori or from statistics of past experience), while in the case of uncertainty this is not true, the reason being in general that it is impossible to form a group of instances because the situation dealt with is in a high degree unique”.[16] The main information to be taken from these lines is that experience is of the utmost importance for the reduction or the perceived reduction of risk. Combined with a technical definition of risk this leads right back to the model of a rational actor: “The technical concept of risk focuses narrowly on the probability of events and the magnitude of specific consequences. Risk is usually defined by multiplication of the two terms…”.[17] To make a proper assessment of the risk attached to a particular decision an actor needs full information about past and future, which, obviously, he cannot have. Not only does he lack crucial information, he also has to struggle with misperceptions, biases and stereotypes that hamper his taking stock objectively. This has led Mitchell to differentiate between an objective and a subjective risk.[18] E.g., the objective risk of getting sick from eating genetically engineered food is much smaller than the risk of getting seek from meat consumption.[19] Nevertheless, subjective perceptions often rank the latter below the former. Due to deviations of objective and subjective risk, Fischhoff came to the following conclusion: “Although, there are actual risks, nobody knows what they are. All that anyone does know about risk can be classified as perceptions. … In this light, what is commonly called a conflict between actual and perceived risk is better thought of as the conflict between two sets of perceptions, those of ranking scientists in their field of expertise and those of anybody else”.[20] However, if objective evaluations of a particular risk are nothing else than “informed guesses”, than it can be viable to drop the concept of “objective risk” altogether: “One of the most important assumptions in our approach is that risk is inherently subjective. Risk does not exist ‘out there’ independent of our minds and culture, waiting to be measured. Human beings invent the concept of ‘risk’ to help them understand and cope with the dangers and uncertainties of life. There is no such thing as ‘real risk’ or ‘objective risk’.[21] It is important to stress that Slovic’s approach is meant to be an approach for explaining actors’ actual behaviour, it is not an approach to model typified actors’ behaviour.[22] So given that risk is not an objective entity but a perceived one, what are the factors that affect risk perception? “The main thesis … is that risk events interact with psychological, social, and cultural processes in ways that can heighten or attenuate public perception of risk and related risk behaviour”.[23] Risk exists only as perceived risk and the extent of risk perceived by an actor is a function of information sources, his ability to assess risks and existing explanations for a given risk.[24] Individual risk assessment within a frame entrenched by cultural and societal boundaries is a process that consists of (1) assessing information before the background of personal experience, (2) filtering the information available with reference to interests, and (3) assessing filtered information according to assumed reliability of source.[25] To shorten this lengthy process actors use heuristics to assess the risk attached to a particular decision: “When lay people are asked to evaluate risk, they seldom have statistical evidence on hand. In most cases they make interferences based on what they remember hearing or observing about the risk in question. Research has identified a number of general inferential rules that people use in such situations. These rules, known as heuristics are employed to reduce difficult mental tasks to simpler ones”.[26] But, the afore mentioned Tversky and Kahneman showed that heuristics can provide poor guides, the more so if they are flawed with respect to salience and framing. While salience refers to perception of risk being heightened by frequency and prominence of exposure, framing refers to assessments being bound to a particular frame of perception. Both, salience and framing, may compromise rationality, especially through the heuristic of representativeness,[27] the anchor heuristic[28] and the availability heuristic[29] that cloud individual judgement.[30] If heuristics sometimes guide actors to decisions violating the rule of rationality, the question, whether a heuristic is considered to be a sound heuristic, one worth trusting, or not, becomes a question of some importance. Consequently, the risk perceived to be attached to a certain investment is a function of situational variables, past experience and heuristics deployed to make the right decision. To become a feasible heuristic used in the context of investment decisions, a heuristic must provide a link between personal experience and the investment decision at hand. So the question, whether customer satisfaction or customer satisfaction indices are a useful means considered in investment decisions boils down to the question whether the respective index or personal experience is considered as useful means to give more security to investment decisions.

[...]


[1] Martin (2011), p.5.

[2] Grünig & Kühn (2009), p.30.

[3] Markowitz (1991), p.470.

[4] Baumol & Binder (1988), part 1.

[5] Simon (1982).

[6] Tversky & Kahneman (1974).

[7] Kahneman (2003).

[8] Shiller (2003).

[9] Tversky & Kahneman (1986), p.S251-S252.

[10] Barberis & Thaler (2002), p.6.

[11] Mitchell (1999), p.164-165.

[12] McDaniels & Small (2004), p.3.

[13] Cohrssen & Covello (1999), p.7.

[14] Ferner (1992), p.125.

[15] Markowitz (1959), p.53; Markowity uses the standard deviation of, e.g., past stock prices as a measure of risk. The higher standard deviation of a given stock, the more risky is investment in the particular stock.

[16] Knight (2002), p.233; To give an example: While the risk of politicians lying to voters for gaining their vote can be calculated based on well-known past experience, by contrast a politician expressing novel ideas is engulfed in the mist of uncertainty due to his being rather unique.

[17] Kasperson et al. (1988), p.177.

[18] Mitchell (1999), p.164.

[19] Finucane (2002), p.31-32.

[20] Fischhoff (1989), p.270.

[21] Slovic (1992), p.119.

[22] Portfolio-theory endeavours to reduce risk by calculating standard deviations from past developments and by assuming that this approach says something about the future (Markowitz, 1959). Clearly, this assumption is only true when actors act in future as they did in the past. This assumption, known to be a conclusion derived of inductive reasoning is somewhat prone to failure as discovered by a turkey invented by Bertrand Russell (1949, p.255). The very turkey found himself in an enclosed space and realized after a while, that every day at daybreak he would find food at a particular place. After a while, he went to the place expecting to find food. His expectations got fulfilled until one day, it was Christmas day, the turkey’s throat got cut. While a good predictor of the future for some time the turkey’s inductive reasoning failed at a crucial moment.

[23] Kasperson et al. (1988), pp.178-179.

[24] Kasperson et al. (2003), p.16

[25] Rosa (2003), pp.58-62.

[26] Slovic, Fischhoff & Lichtenstein (1981), pp.17-18.

[27] Taking one case as evidence for a general relationship.

[28] Assessments differ with the way a problem is presented.

[29] Easy access to particular information lead actors to belief they are important.

[30] Kahneman (2003), p.1458.

Ende der Leseprobe aus 13 Seiten

Details

Titel
Customer satisfaction and reduction of investment risk – Is there a link?
Autor
Jahr
2011
Seiten
13
Katalognummer
V170282
ISBN (eBook)
9783640890347
ISBN (Buch)
9783640890507
Dateigröße
457 KB
Sprache
Deutsch
Schlagworte
customer
Arbeit zitieren
Thomas Bister-Füsser (Autor), 2011, Customer satisfaction and reduction of investment risk – Is there a link?, München, GRIN Verlag, https://www.grin.com/document/170282

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