Christian Goglin "Emotions and Values in Equity Crowdfunding Investment Choices 1"

Acknowledgments

This book deals with choices in situations of uncertainty, emotional reactions and values. It is derived directly from doctoral thesis work carried out between 2016 and 2018.

I would like to thank Professor Philippe DesbriГЁres, my thesis supervisor, for giving me the chance to commit myself to this PhD, for giving me a great deal of freedom, and also for supporting, encouraging and guiding me by suggesting ideas that I have been also substantially developing or by recommending training which was always timely. Moreover, I am honored by the confidence he has shown in me during these 3 years and I am deeply grateful to him for it.

I would like to thank Mr. Marc Filser for his availability, his support in the financing of an experiment, his review of the experimental protocol, his advice and for edifying avenues for reflection and, finally, for doing me the honor of participating in my thesis jury.

I am also grateful to Professors VГ©ronique BessiГЁre and Armin Schwienbacher for having accepted the demanding role of referee in my thesis jury. Reading their work has fed my reflection and their comments will be sources of enrichment for my future. I hope that they will find the expression of my respectful gratitude here.

I would like to thank the members of Crego for their constructive and kind remarks during laboratory seminars. In particular, I would like to thank Mr. GГ©rard Charreaux for his always valuable remarks, Mr. Fabrice HervГ© for his support and wise recommendations and Mr. Bertrand Belvaux for his suggestions concerning the analysis of the data. Finally, I would like to thank Mrs. Г‰velyne Poincelot and Miss Kirsten Burkhardt for their pertinent remarks.

I will not forget the professors of my research master’s degree in management sciences, some of whom were able to bring abstract concepts or theory to life through their passionate communication.

I would like to thank the members of the CRESE research laboratory at the Université de Franche-Comté for their hospitality and the sound advice from their economists, in particular, Mr. François Cochard and Ms. Karine Brisset.

Many thanks also to the doctoral students Ms. Gaztelumendi and Ms. Bataillard for their diligent participation in pretesting experiments.

I would also like to thank the university staff who collaborated or facilitated the organization of experiments, particularly Ms. Bois-Prinet, Mr. FrГ©dГ©ric Pellerin, Mr. Renaud Aubert, Ms. ChloГ© Roger, Mr. Guy-Daniel Ligan, Ms. Esla Fachinetti, Ms. Florence Demougeot, Ms. Chittaro and Mr. Millereux.

Finally, I would like to thank my wife, who has personally contributed to the experimentation and has supported me unconditionally in this adventure, as well as my daughter, who was born only a few months before this big move and who, for many weekends, had to put up with a studious father. I dedicate this work to them as well as to my late maternal grandmother, my “mamie”, without whom nothing would have been possible.

Introduction

[…] we neither strive for, nor will, neither want, nor desire anything because we judge it to be good; on the contrary, we judge something to be good because we strive for it, will it, want it, and desire it.

Baruch Spinoza, quoted in Miller (2015)

This introduction begins with a brief introductory statement on the genesis of this research, then continues with a presentation of the context, the justification and exposition of the research object, the methodological approach taken, and the expected contributions of this book before concluding with a presentation of the general plan of this book.

The starting point for this research topic is a simple premise: “behaviors and, more specifically, the choices of investors operating on equity crowdfunding (ECF) platforms were, a priori, necessarily marked by a strong emotional dimension.” From this first approximate conjecture, the result of a spontaneous interpretation that comes from the psychology of common sense, the next step was to follow a rigorous, scientific approach. First of all, this inductively inferred conjecture required a literature review in the field of entrepreneurial finance.

Research context

ECF is a recent financing method. Therefore, of course, the scientific literature on the subject is not very developed. The first works, which are descriptive, focused on themes such as the success of fundraising campaigns or the motivations of the participants on the platforms. The historical sectors or professions of crowdfunding, donation and reward-based crowdfunding were first explored, and these results were then used as a basis for research into ECF, which is more financially-oriented. In fact, this innovative method of financing, by subscribing to the capital of a young company, involves a host of investors who are a combination of friends and family, business angels and crowdsourcing participants (OnnГ©e and Renault 2014).

The question of the choice of projects by investors is essentially dealt with from the perspective of information theory or signal theory (Akerlof 1970; Spence 1973)

(#ulink_5249bd09-064c-5a11-b838-22bd45767bba). Information asymmetry is particularly strong for companies at the seed stage, where potential investors seek to interpret the available information on the project to detect quality signals (Ahlers et al. 2015). The information available to potential investors is protean, consisting primarily of information provided by management, including the project description, a video of the entrepreneurs’ pitch, the business plan and all of the fundraising campaign’s posts. Secondarily are all the social interactions on the platform (Lin et al. 2013; Freedman and Jin 2014). This includes exchanges between investors or questions and answers between investors and managers. The kinetics of the campaign (Hornuf and Schwienbacher 2015b) and the completion rate of the fundraising target (Agrawal et al. 2014) are also important quality signals. All this information leads the investor, who is not competent to judge the appropriateness of investments on their own, to imitate, which is a behavior at the origin of the herd behavior which can lead, to a certain extent, to information cascades, i.e. a situation where only the decisions of other agents determine investment choices.

Social interactions can also take place outside the platform, for example, for friends and family who will in fine invest on the platform. In this case, literature considers that friends and family have private information that can be assimilated to a quality signal (Agrawal et al. 2015). It should also be noted that, although distance is another factor explaining the choice, it is strongly correlated with friends and family.

A second approach is implicit; it consists of inferring the determinants of individual choices from those of the crowd as a whole. Indeed, the choices of the crowd result, according to methodological individualism (Boudon 2004), from the aggregation of individual choices. More precisely, studies of the success of campaigns reveal the choices made by the crowd. However, the main determinants of the success of fundraising campaigns are social in nature. In addition to the herd behavior already mentioned, Mollick (2013) shows that the size of an entrepreneur’s social network is a key success factor. However, the social network is merely an extension of the group of friends and family to circles of indirectly connected individuals. Therefore, the explanation for this effect is likely to be twofold: the number of Facebook friends or Twitter followers can be interpreted per se as a quality signal; moreover, when the members of this social network participate in the campaign, the explanation of private information about the leaders and their chances of success, given for friends and family, is also applicable.

Finally, these different explanations for the choice of projects are all based explicitly or implicitly on signal theory, in which the decision-maker is endowed with an instrumental rationality and seeks, by capturing quality signals, to maximize its usefulness, which can be identified by the risk/return ratio for finance. This perspective, which derives from the neoclassical school’s postulates of rationality that prevail within the efficiency of financial markets, reduces choice to its cognitive dimension, which excludes any emotional or affective explanation.

Nevertheless, a body of emerging research converges to admit that the choice of projects may be based on reasons other than an exclusive maximization of the expected utility, and even places emotions at the heart of the phenomenon of ECF investments.

Thus, the choice of ECF projects can be connected to the intrinsic motivations of investors. Ryu and Kim (2014) establish this link and show that if the investor is driven by a motivation such as “philanthropy”, “recognition” or “relationship”, then the reward, i.e. the expected return, has no effect on the choice, contrary to the expected social contribution.

BessiГЁre and StГ©phany (2017) believe that crowds act based more on their perceptions than on in-depth analysis; the decision is holistic, intuitive and affect plays an essential role, as does familiarity with risk perception, the latter being altered by the affect heuristic.

In the field of entrepreneurship, several authors examined the effects of entrepreneurial affect (Milovac et al. 2015), pitch (Davis et al. 2017) and narrative emotions (Wuillaume et al. 2016) on investors; their evaluation; and their choices. In addition, Allison et al. (2017) studied the phenomenon of persuasion that is at play between entrepreneurs and investors.

In the field of human–computer interaction, Josue and Bahm (2016) propose a method for measuring the emotional impact of pitch videos on sponsors, in line with the results uncovered in the field of marketing regarding the impact of videos on consumer attitudes (Graillot 1996).

The ECF investment framework presents several characteristics that probably make a marketing approach relevant: intrinsic and extrinsic motivations (Hemer 2011), a consumer rather than shareholder logic, linked to limited information and a lack of financial expertise (BessiГЁre and StГ©phany 2014), but, above all, a context of persuasion through storytelling, images and video pitches, which are the ingredients of the phenomenon of advertising persuasion studied in the field of consumer theory.

Moreover, beyond the management sciences, in the social sciences and humanities, more specifically, in the fields of the psychology of emotions and judgment and decision-making, the effects of emotional reactions on judgments and decisions are well-established (Zajonc 1980; Frijda 1986; Loewenstein et al. 2001; Slovic et al. 2002; Kahneman 2003). The neurosciences consolidate the theoretical edifice with the work of Bechara and Damasio (2005) on the somatic marker hypothesis, which constitutes, in a way, the linchpin.

This book falls within the field of behavioral finance, at the crossroads of finance and psychology, but is not confined to these disciplines, because knowledge cannot stop at the clear edge of a definition or disciplinary divides. Thus, an interdisciplinary theoretical framework is used, including concepts, models and theories that are reasonably transferable and capable of improving the understanding of our research object.

Purpose of the research

The purpose of this research is to understand, explain and predict the emotional dimension of project choices by ECF investors, without excluding the cognitive dimension. The particular role of a variable of congruence of the investor’s values with those put forward by the project is highlighted, which explains the title of this book. This variable, which is directly related to affective reactions (Schwartz 2006), emerged in the course of the research by means of abductive inference, and was then confirmed theoretically, but also empirically, because of a substantial body of qualitative data. Therefore, from our point of view, the rationality of the investor is complex, an axiological rationality is added to his instrumental rationality, as well as an “affective rationality” that we will define.

This work is exploratory in nature: its aim is to produce an original theory that brings a different and complementary perspective to signal theory. This theory is called the “affective matching” theory; part of its roots lie in the interactionist theory of “Fit-IO” for which individuals are attracted to organizations whose values and norms are congruent with their personal values and norms (Chatman 1989; Kristof 1996; Chapman et al. 2005). The theory of “affective matching” is also in line with the theories of “cognitive consistency” (Vaidis and Halimi-Falkowicz 2007), and it requires the investor to match the project with which they have a minimum “affective distance” or, equivalently, a maximum “affective matching”. The term “affective matching” replaces the term “utility” used in economic decision theory, because the model is not exclusively consequentialist, but nevertheless has similarities with the concept of utility taken from the original meaning of the precursors of decision theory, for which it was a measure of pleasure and punishment (Bentham 1789).

Methodology

Our epistemological approach is postpositivist and the chosen methodology is based on a recursive loop between abduction/deduction/induction types of inference using the body of qualitative data already mentioned (David 1999). An explanatory model is proposed; testing its hypotheses requires the organization of a controlled experiment. Its empirical validation is based on a structural equation model. Additonally, a second model that was developed as an extension of the explanatory model and qualified as an individual predictive model implements the theory of affective matching; testing its predictive quality requires developing an original similarity measure like the distance between vectors.

Expected contributions

The issue of this book is first of all theoretical: this research aims to contribute to the emerging movement of ECF research that advocates a project choice based on the affect and not exclusively on the cognitive. The proposed theory of affective matching and its implementation by an individualized model makes, on the one hand, the prediction of Mangot (2013) – for whom “behavioral finance should not, in the near future, be spared an approach aimed at personalizing behaviors” – a reality and responds, on the other hand, to the call of Pare and Rédis (2011) for the “integration of concepts, and even methods from other disciplinary fields” in order to go beyond the “hypotheses of traditional finance, which are, as has been shown, unsuitable for the new company”.

The theoretical questions to which this book will try to provide some answers are as follows:

– Do values and emotional reactions determine the choice of projects in ECF?

– What are the relative influences of these two variables?

– What is the link between values and affective reactions?

– What is the history of affective reactions?

– In the absence of social interactions, does the affective dimension dominate over the cognitive dimension of choice?

– Can an explanatory and predictive model of individual choice be established a priori based on knowledge of investor preferences?

– Is such a model meant to be normative?

– What is the investor’s rationale?

Beyond the expected theoretical output, this book aims to provide the practitioners of ECF – first and foremost, investors – with a better understanding of their choices and the judgmental biases or heuristics to which they may be unconsciously subjected. The Autorité des marchés financiers (AMF), the French organization whose mission is to protect retail investors, will be able to use these results to back up the warnings given to investors.

Fundraising entrepreneurs will be able to usefully draw conclusions about the factors that attract investors, as this shareholder community is sought after for reasons of cognitive input that go beyond financial input. Other applications of the affective matching model, of an industrial nature, are possible and will be discussed in the conclusion.

General structure

This work is organized into two volumes; the first sets out the choices and theoretical foundations on which the second volume (Goglin 2020), which presents our contribution, is based.

This research is organized as follows: the first part (Volume 1) first presents the context of crowdfunding and ECF and then progressively introduces and justifies the object of this research (Chapter 1 (#u6a07a9fa-6f6f-5101-9c9e-3e6ae153c550)). A state of the art that intersects several fields of social science research leads to a theoretical framework (Chapter 2 (#udc13d4e0-acb6-5fa4-8a05-b00a0a6aa3de)). The second part (Volume 2) opens with the modeling and operationalization of the concepts (Chapter 1 (#u6a07a9fa-6f6f-5101-9c9e-3e6ae153c550) of the second volume). The experimental test protocol is then presented (Chapter 2 (#udc13d4e0-acb6-5fa4-8a05-b00a0a6aa3de) of the second volume). The last chapter (Chapter 3 of the second volume) tests the hypotheses and initiates a discussion before the final conclusion.

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(#ulink_78786a86-69e3-5590-a39f-1d8476a69eba) It should be noted that the concept of a signal developed by these two authors is used in several articles of our literature review in the exclusive sense of information, without there being any associated cost, as the theory suggests.

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