The Two-System View of Cognition and Investor Choice

Abstract

This paper examines how investors’ effortless intuition (System 1) and deliberate reasoning (System 2) jointly influence their investment decisions. We assemble a novel dataset of livestream promotional events associated with the initial offerings of mutual funds in China between 2020 and 2024, a setting in which no prior performance records or portfolio disclosures are available, allowing us to isolate the effects of distinct cognitive processes. We find that investors’ intuitive favorable responses to presenters’ dynamic emotional displays, including vocal tone, facial expressiveness, and body movement, are positively and significantly related to subsequent fund subscriptions. This effect attenuates when livestreams convey (complex) information or feature fund managers in ways that engage investors’ analytical processing, indicating that System 2 scrutiny can override System 1-driven impressions. Our novel evidence on the interaction of intuition and reasoning in shaping investment choices provides a basis for developing a richer positive theory of investor behavior.

Bio

Dr. Li, a Fellow of the Royal Society of Canada (Class of 2022), holds the Canada Research Chair in Corporate Governance and W. Maurice Young Endowed Chair in Finance at the UBC Sauder School of Business, University of British Columbia. She is Managing Editor of Journal of Financial and Quantitative Analysis.

Dr. Li’s research focuses on the economic consequences of corporate governance mechanisms. Her current research projects explore: (1) gender and finance, (2) corporate culture, and (3) green innovation. Her research has appeared in Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Management Science, Journal of International Business Studies, and many other leading journals in Finance and Economics. She is the recipient of the UBC Killam Research Award, the Sauder School of Business Research Excellence Award (both junior and senior categories), and the Barclays Global Investors Canada Research Award, a Senior Fellow of the Asian Bureau of Finance and Economic Research, a Research Member of the European Corporate Governance Institute, and a Research Fellow of the FinTech at Cornell Initiative. She is on the Editorial Board of Journal of International Business Studies, Journal of Financial Intermediation, Journal of Financial Stability, and Pacific-Basin Finance Journal. She has also served on the Editorial Board of Review of Financial Studies, Review of Finance, Management Science, Journal of Corporate Finance, Journal of Banking and Finance, and Financial Management. Her research has been featured in Wall Street Journal, New York Times, Washington Post, Financial Times, The Time Magazine, Reuters, CNBC, Bloomberg, Dow Jones Newswire, New Yorker, BBC, BNN, CBC National, CTV National News, National Post, Globe and Mail, U.S. News & World Report, Harvard Business Review, and Yahoo! Finance.