Qualitative Research in Financial Markets

Investment decision making from a constructivist perspective

Carlo Massironi, Marco Guicciardi,
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QRFM
3,3 Investment decision making from
a constructivist perspective
Carlo Massironi
158 Studio Massironi Consulenza Finanziaria, Garda, Italy, and
Marco Guicciardi
Received 16 June 2010 Department of Psychology, Cagliari University, Cagliari, Italy
Revised 21 December 2010,
16 March 2011
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Accepted 28 March 2011 Abstract

Purpose – This paper aims to introduce the reader to investigate some aspects of investment
decision making from a constructivist perspective.
Design/methodology/approach – The constructivist perspective is introduced in its dual nature of
epistemology and of modelization. From constructivist epistemology, the paper mentions the
corollaries of theoretical pluralism and cognitive pragmatism. From Kruglanski and Ajzen’s Lay
epistemology theory, the paper presents in more detail a constructivist modelization for the study and
improvement of formal processes of investment decision making.
Findings – Beginning from the proposed framework, the paper indicates the lines for the
development of a critical (or reflective) investment decision-making attitude. This is an investment
decision making which is able to reflect on its own constructs and cognitive processes in order to
develop investment processes with a higher “constructivist awareness” and efficacy.
Originality/value – The proposed modelization can contribute to the work of those dedicated to the
development of better formal processes of investment. The paper presents three examples of possible
applications potentially useful for the improvement of the processes of asset valuation of value
investors.
Keywords Investment decision making, Constructivism, Lay epistemology theory, Asset valuation,
Value investing, Corporate investments, Decision making
Paper type Conceptual paper

1. Introduction in the form of a summary

This article aims to introduce the reader to the constructivist perspective for the study
of investment decision making. It is divided into five sections called: “Introduction”,
“Perspective”, “Modelization”, “Methodology”, and “Examples”.
Section 2 introduces constructivist epistemology and constructivist modelization[1].
Section 2.1 assumes that “the map (every scientific model) is not the territory” but only
one of its more or less useful representations. And for that reason, it proposes an
attitude of theoretical pluralism (there are infinite possible maps of the same territory)
and of cognitive pragmatism (you choose which map to use based on what helps
you achieve your goals). According to the principles of constructivist epistemology,
there are a number of possible modelizations, each useful for different operational
purposes. In this perspective, even cruder models are preferable if they are useful for a
specific operational aim. Among the available ones, Section 2.2 is the option proposed
Qualitative Research in Financial for the study of investment decision making.
Markets Section 3 presents the “Lay epistemology model” for the study (and possible
Vol. 3 No. 3, 2011
pp. 158-176 improvement) of the formal processes of decision making that investors claim to adopt.
q Emerald Group Publishing Limited
1755-4179
Section 3.3 describes decision making as an epistemic sequence in which the subject
DOI 10.1108/17554171111176895 creates if-then linkages from different types of premises. The possible if-then linkages
 are potentially infinite. According to the model, however, at a certain stage the decision Investment
maker stops the evaluation process (stops the epistemic sequence) and reaches a decision making
conclusion. The model postulates specific breaking and releasing mechanisms which
stop the epistemic sequence, or reactivate it, and in so doing, call into question legitimacy
of the reached conclusion. The breaking and releasing mechanisms are the heart of the
model. Employing the Lay epistemology model to study investment decision making,
means looking for the breaking and releasing mechanisms that determine a specific 159
process of investment decision making. Some breaking and releasing mechanisms are
macro factors which are common to different decision-making processes, while others
are situational factors specific to each individual decision-making process. Applications
of the Lay epistemology model have so far focused mainly on the study of common
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macro factors, and they have stated the difficulty in studying the “potentially infinite”
variety of situational factors.
In our view, the constructivist perspective, with the corollaries of theoretical
pluralism and of cognitive pragmatism, with its preference for small-scale maps (useful
for a specific purpose), makes the study of situational factors possible and useful.
In Section 4, we report some methodological difficulties related to the study of the
situational factors involved in the process of investment decision making. According to
a correct methodological approach, the examined (situational) factors should be
decided a priori, possibly among those listed in the literature as relevant to a given
situation (“conventional analysis”). However, if the factors under examination are truly
situational, a “conventional analysis” will produce conclusions which are shared by the
scientific community, but not necessarily insightful and operationally useful.
The methodological instruments of research that we propose in this paper are
ethnographic analysis and cognitive-historical analysis. They have been widely
discussed in literature, and we choose them from time to time on the basis of acuity and
pragmatic usefulness of analysis. The criterion of acuity (and usefulness) of the
analysis is compared with the criterion of conventionality of analysis.
The constructivist perspective is better suited to serve a decision maker rather than a
decision-making researcher. In this sense, the study of breaking and releasing
mechanisms that determine a specific investment decision-making process is functional
to allow decision makers to influence those breaking and releasing mechanisms. We
name critical (or reflective) investment decision maker that decision maker who, through
the constructivist perspective, achieves a greater understanding of his own
decision-making process.
Section 5 shows some examples of possible applications of the constructivist
perspective to the study of formal decision-making processes of value investors. This
category of formal decision-making processes has been chosen, as one of the two
authors of this article uses them daily as asset manager.
In this section, we describe the evolution of formal procedures for asset valuation
developed by value investors from Graham and Dodd, via Buffett, up to Greenwald’s
recent developments. We also provide three examples of possible research into the
formal decision-making processes of value investors. The setting of the research from a
constructivist perspective is useful in order to develop a critical (or reflective) value
investing towards one’s own formal processes of investment decision making. We
believe that the proposed approach is extensible to other different formal processes of
investment decision making.
 QRFM 2. Perspective
3,3 In most studies published in the literature, the decision-making processes and the
investment decision-making processes are analysed at an excessively high level of
abstraction, and from perspectives that are not particularly useful for investment
professionals.
We believe that this stems from the attempt, made by many researchers, to offer
160 models which are able to account for the largest possible number of factors involved in
the decision-making process. They produce “maps”, sometimes very detailed ones,
which nevertheless do not show those signposts which travellers would find useful.
In this article, we propose to approach the study of investment decision making
from a constructivist perspective (Watzlawick, 1984; and in particular von Glasersfeld,
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1984). We believe that, from this perspective, it is possible to produce “maps” of some
practical value for investment decision makers.
The constructivist perspective could be divided into two components: a
constructivist epistemology and a constructivist modelizzation.

2.1 Constructivist epistemology

An epistemology (of any kind) is a theory about to what extent, and how, we can get to
know the world through our own efforts (Morin, 1986). If we adhere to constructivist
epistemology, we adopt a vision by which we cannot reach a definitive understanding of
the world, no matter how much theoretical and methodological effort or how many
millennia (as human race, of course) we devote to achieving our goal. Constructivist
epistemology can be summarized in Korzybski’s (1933, p. 38) famous statement: “the
map is not the territory”, but only one of its more or less useful representations. This
means that our explanatory scientific models are only representations: sometimes useful
representations, sometimes beautiful but useless ones. Constructivist epistemology
has two important corollaries: theoretical pluralism and cognitive pragmatism
(Salvini, 1988).
By theoretical pluralism, we mean the adoption of a perspective from which no map
(no model) is the territory. Accordingly, there are limitless possible maps of the same
territory, each showing useful details for different kinds of journeys in that territory.
By cognitive pragmatism, we mean the adoption of a criterion for selecting the maps
depending on a particular practical purpose (pragmatic). In a pragmatic perspective, it
makes no sense to discuss whether some maps are better than others are, if you do not
specify “better for what operational purpose” (cognitive pragmatism). Rather, it makes
sense to ask whether the map is viable, adequate for a purpose (von Glasersfeld, 1984).
In many cases, even highly simplified maps, but specifically designed for a particular
purpose, can help the traveller much better than others, which are extremely detailed.
Examples of this are underground maps, which are very simplified and, exactly for this
reason, very practical.

2.2 Constructivist modelization

According to constructivist epistemology, there are a number of possible modelizations
of what we intend to study, each useful for different operational purposes. For example,
we can study a professional investor using neuroimaging techniques, or by analysing
his behaviour as a social act guided by rules (whether intentional or unintentional).
Alternatively, we can choose as the level of analysis the collective behaviour of a group
 of investors operating on the same market, rather than the individual investor. None of Investment
these modelizations can claim for itself a privileged status as “truer” or “better” map of decision making
reality in an absolute sense, but only in relation to specific conceptual, methodological,
or practical problems.
Among other alternatives, we have the possibility of modelizing the investor as an
individual who is not endowed with the ability to reach a definitive understanding of the
world, and for this reason, as an individual who makes his own decisions by building 161
different models of reality. We call this modelization constructivist modellization.
Constructivist epistemology is a specific idea of how scientists can (or, better still,
cannot) acquire knowledge of the world. Constructivist modellization is the extension
of that same idea to the investors we intend to study.
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It should be noted that the adoption of a constructivist epistemology does not

necessarily imply the adoption of a constructivist modelization.
The rest of this article is devoted to the description of a particular form of
constructivist modelization we have developed from Kruglanski and Ajzen’s (1983)
Lay epistemology model.

3. Modelization
3.1 A modelization for the study of formal processes of investment
We propose a constructivist modelization for the study of formal decision-making
processes that investors recognize (and strive) to take. In choosing to study the formal
processes, we are aware that other objects of study, for example, the impact of
emotional state (mood) of the decision-maker on his ability to follow a formal
decision-making process, can be just as important from a practical point of view. It is
our firm conviction that the study of the processes of investment decision making
should not and cannot be reduced to the study of formal processes of decision making
from the constructivist perspective that we propose. We are also aware that human
beings, in many circumstances, are unable to accurately report the mental processes
underlying their judgments and decisions (a phenomenon known as “asking more than
they can say”). We just propose here the use of a constructivist modelization to try
improving the formal aspect of investment decision-making processes.
We believe that the constructivist modelization we propose can help to show
professional investors how they use their constructs, and the limitations imposed on
them by the language and cognitive processes they adopt. Our intent is to show
investors the process by which they build the reality they live in. This goal is specific
to the constructivist perspective. We believe it is possible to do this by analysing both
the reports in scholarly journals where professionals describe their investment
processes, and analysing professionals in their natural environment to see how they
build their own reality. In the first case, our analysis will be more focused on
conceptual constructs (“language”) available to the subject, while in the other case, the
focus will be more centered on the entire process of construction of the reality in which
the person lives.

3.2 What modelization for a constructivist analysis

Different disciplines, ranging from sociology, cultural anthropology, social
psychology, have developed different modelizations that might be described as
“constructivist.”
 QRFM Some of these modelizations have already been applied to the study of investment
3,3 decision making. See, for example, concerning the belief systems of financial operators:
Callon (1998, 2007), Steiner (1999), Smith (1999), MacKenzie and Millo (2003), Pixley
(2004), Beunza and Stark (2005), Zaloom (2006) and Muniesa (2007); about the effects of
interaction processes on belief systems: Baker (1984), Abolafia (1996, 1998), Stigliz
(2000), Knorr Cetina and Bruegger (2002), Arnoldi (2006) and MacKenzie (2006).
162 We developed the present modelization within this broad constructivist landscape
and, more specifically, starting from Kruglanski and Ajzen’s (1983) “Lay epistemology
model” for the study of judgment and decision making. The next two sections are
devoted to the presentation of their model.
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3.3 The Lay epistemology model

The Lay epistemology model was outlined and developed by Kruglanski and his
colleagues from the late 1970s (Kruglanski et al., 1978; Kruglanski, 1979, 1980). The
model conceptualizes human judgment as a single, unitary process and the strategies
(heuristics) adopted at any given time by the subject as specific instances of the process.
From this viewpoint, all knowledge can be considered characterized by two aspects:
its content and the confidence you have in it. Contents can vary widely, ranging, for
example, from the notion that “wine has a nice taste” to the notion that “the earth is
round”. The model assumes that, as different as these notions may be, they are both
achieved through the same epistemic process.
The subject may then attribute to any notion a different degree of confidence. To
use Kruglanski and Ajzen’s (1983, p. 12) formulation:
Strongly accepted propositions are often referred to as “facts”, while propositions in which we
have less confidence are usually termed “hypotheses”. Thus, the difference between facts and
hypotheses is assumed to be one of subjective confidence, rather than of objective veridicality
(italics added).
The Lay epistemology model describes an “epistemic sequence”, consisting of a series
of cognitive operations – as listed below – which a person produces in the process of
acquiring new knowledge:
(1) Epistemic purpose. The sequence is triggered by an individual’s interest in a
given item of information, or in the resolution of a given problem.
(2) Cognition generation. The specific cognitions, or hypotheses are generated.
(3) Cognition validation. This is accomplished via deductive logic[2]: individuals are
assumed to deduce their inferences from premises in which they already believe.

By their own admission, the model suggested by the two authors does not focus on
how cognitions are generated (point (2) above) any further than stating: “cognitions are
generated as part of the fluctuating stream of associations” (p. 17). It rather brings
forward some speculations about the conditions that may motivate the generation of
hypotheses (point (1)) and concentrates mainly on the process of cognition validation
(point (3)). To that purpose, the model assumes that the individual is endowed with
“subjective logic”:
We are suggesting [. . .] that human beings are subjectively logical; that is, they operate
deductively by forming “if-then” linkages among cognitions and reaching their conclusions in
accordance with such reasoning (p. 14).
 The said model points out how logical errors made by individuals tend to decrease Investment
significantly “when respondents are presented with everyday or concrete propositions decision making
that they understand and accept as opposed to abstract or symbolic statements of the
kind employed by professional logicians” (p. 14).
The model further assumes that “any conclusion or judgment can be deducted from
different types of evidence depending on the conditional ‘if-then’ linkages (major
premises) that an individual happens to form”. As the number of these linkages is 163
virtually endless, “there are a correspondingly inexhaustible number of evidential
items relevant to any inference” (p. 15).
The latter element of the model proposed by the two authors coincides with their
sceptical vision of scientific knowledge. Such an assumption conceptualizes the
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epistemic sequence as an unstable balance between cognition generation and validation,

which in principle could continue endlessly, as alternative competing (contradictory)
cognitions are put forth and validated in endless succession. On a practical level,
however, the sequence does come to a halt at some point.

3.4 Freezing and unfreezing the epistemic sequence

The model postulates some “braking” or “freezing” mechanisms that terminate the
potentially endless epistemic sequence. Furthermore, it postulates some “releasing” or
“unfreezing” mechanisms, which may reactivate a previously halted sequence, in order
to factor in the modification of once firmly held beliefs. More specifically, the two
authors describe what they consider to be the two main categories of freezing and
unfreezing mechanisms, as follows:
(A) Capacity (to generate competing alternatives), which is influenced by:
(A1) the possession of a relevant background knowledge, which improves the
capacity to generate hypotheses on a given topic; and
(A2) some situational facts, as availability and salience.
(B) Motivation (to generate competing alternatives) – at least three significant
factors may influence the individual’s tendency to generate alternative
hypotheses:
(B1) The need for structure. It tends to freeze the hypothesis-generation
process, a phenomenon that often occurs when the time to take a
decision is limited and the subject tends to adhere to an early hypothesis
and to be insensitive to evidence for possible alternatives.
(B2) The fear of invalidity. It is assumed to exert a facilitating influence on the
hypothesis-generating process because of reluctance to commit oneself to
a given, potentially erroneous hypothesis. It is present, for instance, in
situations where the subject will be judged based on the correctness
(conformity to some given desirable outcome standards) of his judgment
capacity.
(B3) The preference for desirable conclusions. Individuals are more likely to
reach conclusions consistent with their wishes rather than inconsistent
ones.
According with the above-listed categories of freezing and unfreezing mechanisms
((A1) and (A2) and (B1)-(B3)) beliefs can be highly precarious and unstable.
 QRFM The breaking and releasing mechanisms are the heart of the model. When we
3,3 employ the Lay epistemology model to study investment decision making, we are
looking for the breaking and releasing mechanisms that determine a specific process of
investment decision making. Some breaking and releasing mechanisms are macro
factors and they are common to different decision-making processes, while others are
situational factors specific to each individual decision-making process.
164 Most applications of the Lay epistemology model made so far, primarily by
Kruglanski (for an updated list, available at: www.terpconnect.umd.edu/, hannahk/
Articles.html), have focused on the study of common macro factors (the need for
structure and the fear of invalidity), and they have stated the difficulty in studying the
“virtually inexhaustible” variety of situational factors.
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In Kruglanski and Ajzen’s original conception, the model renounces the definition of a
single, unique and defined list of situational facts determining the availability and salience
(factors (A2) above) and determining the preference for some desirable conclusions (factor
(B3)). The model considers the various cognitive and motivational strategies reported in
literature in order to explain decision-making processes, either as specific instantiations of
the deducibility principle, special cases of availability or saliency, or special cases of the
preference for desirable conclusions (p. 23). Those authors consider the hypothetical listing
of such situational facts as “likely to produce inconclusive research findings” (p. 22) and
they limit themselves to ascertaining the unlimited variety of situational factors occurring
in the world. They deem that this unlimited variety could become the subject of
idiographic, rather than nomothetic studies.
In our view, the adoption of theoretical pluralism and of cognitive pragmatism, with
its preference for small-scale maps designed for a specific purpose, makes the study of
even these situational factors possible and useful.
To summarise the two sections above (Sections 3.3 and 3.4), the lay epistemology
model assumes that:
(1) people formulate cognitions that are propitious for advancing their goals or
interests;
(2) people validate their cognitions deductively from other credible cognitions or
evidential criteria they already possess;
(3) the formulation of cognitions depends on their momentary mental saliency and/or
mental availability. The presumed insensitivity of the subjects to statistical
information depends on their momentary lack of saliency and availability.
Conversely, enhancing the salience of statistical information enables individuals
to integrate the statistical information in their process of hypothesis validation;
(4) a cognition can be unfrozen and eventually replaced by an alternative cognition
when anomalous evidence, inconsistent with the first cognition, reaches such
“alarming proportions” that the overall validity of the first cognition is
questioned; and
(5) belief perseverance is an instance of epistemic freezing.

3.5 The study of investment decision making

We believe that by using and extending Kruglanski and Ajzen’s model, the
constructivist study of formal investment decision-making processes can be oriented
along two main lines:
 (1) On the one hand, towards a nomothetic study of macro factors (not necessarily Investment
objectively existing, but of heuristic value for their generalizability) which are suitable decision making
of affecting the epistemic freezing, e.g. as those identified by Kruglanski and Ajzen:,
i.e. need for structure, fear of invalidity, preference for desirable conclusions, salience of
information.
After the publication of his work in 1983, and driven by his nomothetic interest,
Kruglanski applied himself to the study of those factors that may determine the 165
perseverance of a belief. He implemented a series of experiments in which he
manipulated the high/low level of need for structure (through the amount of time
available to the subjects having to make a decision). He also manipulated the high/low
level of fear of invalidity (by informing the subjects that the result of their decisions
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would be made public and they would have to keep a written account of their
decision-making process) and the high/low level of salience.
In light of this experience, it is possible to evaluate, in the study of investment
decision making, how the same general factors may influence the establishment of a
certain construction of reality in the investor (whether professional or not).
In this sense, it is possible to imagine field studies in nomothetic perspective, which
investigate the strategies used by investors to cope with the need for structure, the fear
of invalidity, the preference for desirable conclusions and the salience of information.
This can be done while they dedicate themselves to applying their formal process of
asset valuation and as well as in other phases of their investment process.
(2) On the other hand, towards an idiographic study of the cognitive contents in
which a specific investor (i.e. a successful professional investor), via a deductive
process, anchors his epistemic sequence. This study may or may not be related to that
of the macro factors (breaking and releasing mechanisms) that influence the epistemic
sequence. This is a study of “local” impact, useful to those aiming, for instance, at
reproducing or explaining a certain decision-making process. It starts from a defined
series of cognition contents possessed by the subject in a determined historical moment
and situation (situationism, explicationism). This contrasts with the position of much
of the literature, currently dealing with the cognitive processes as general (not situated)
processes.
As we consider this second line of inquiry more interesting, its exploration
represents the specificity of our proposal for an extension of Kruglanski and Ajzen’s
model. For this reason, we will dedicate the next sections to a closer examination of it.

4. Methodology
4.1 A hermeneutic process guided by a pragmatic criterion
The study of situational factors (contents þ breaking and releasing mechanisms) that
determine a process of investment decision making has some methodological
difficulties. According to a correct methodological approach, the examined (situational)
factors should be decided a priori, possibly among those listed in the literature as
relevant to a given situation. We call this analysis “conventional” because it uses
factors conventionally found in the literature as object of its investigation.
However, if the factors under examination are truly situational, a “conventional
analysis” will produce conclusions which are shared by the scientific community, but
not necessarily insightful and operationally useful ones.
 QRFM The constructivist perspective postulates the cognitive process as an interpretative
3,3 process (hermeneutic process, as defined by Gadamer (1960)). In an interpretative
process, the researcher may delegate to a shared code of interpretation (among those in
the scientific literature in a particular sector) the responsibility for the choices of
interpretation. Alternatively, he can be responsible for making interpretative choices
based on the situation he wants to analyse. This second option is highly questionable,
166 according to the colleagues of the researcher, unless he relies on good reasons of
pragmatic efficiency to justify his (apparently arbitrary) choices of interpretation. The
interpretative choices of the researcher will naturally be more easily shared by those
who also share his pragmatic objectives.
No matter how sophisticated a methodological approach may be, the study of the
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belief systems guiding the decision-making processes of investors, from a

constructivist perspective, is nevertheless a hermeneutic process. A hermeneutic
process is a process of construction of a belief on others’ beliefs, a virtually never
ending action, which is worth undertaking only when presenting a heuristic/pragmatic
value for the researcher.

4.2 Using the instruments of ethnographic analysis and of cognitive-historical analysis

The methodological instruments of research that we propose for this hermeneutic
process are ethnographic analysis and the more recent cognitive-historical analysis
(Nersessian, 2008). The ethnographic analysis is a qualitative approach, which was
originally created for studying human societies in terms of their distinctive cultures.
It relies on direct observations, questionnaires, and interviews to study people’s
behaviour in the context of their daily lives.
The cognitive-historical analysis attempts to enrich a fine-structure historical
examination (traditionally performed by historians of science) of the representational
and problem-solving practices scientists have employed to create new scientific
representations of phenomena, using the models of cognitive science and psychology.
We choose the ethnographic analysis and the cognitive-historical analysis from
time to time on the basis of acuity and of pragmatic usefulness of analysis. In this, we
are close to Feyerabend’s (1975, p. vii) opinion that “anything goes”, provided that it
offers a genuine benefit of some kind. The same position has recently been summed up
by Kayser (2010).
Thus, it is possible to imagine hermeneutic studies in the field or on the written
accounts of the formal process of investment adopted by the investor. These studies
can be carried out through an investigation of the belief system of the decision maker
and of the incessant modification of such system in his interaction (both physical, as
well as symbolic) with other subjects and with his environment.
In field studies, data collection can be achieved through the traditional ethnographic
methods as “shadowing”, “think aloud”, semi-structured interviews and by recording
the sequence of actions and procedures that the viewer is able to grasp by focusing on
the practices that create and change representations, which contribute to the
construction of different mental models.
The proposed procedure lies in the path that stretches from methodologies already
employed by Clarkson (1962) to the ones adopted more recently in the study of creativity,
innovation and conceptual change in science. These latest works combine the mentioned
ethnographic techniques and the cognitive-historical analysis (Nersessian, 2008).
 The uniqueness of our approach lies in the fact that we adopt a constructivist Investment
epistemological perspective of theoretical pluralism and of cognitive pragmatism. This decision making
perspective assigns to the criterion of pragmatic relevance the decision of the
dimensions along which to develop the analysis. This feature helps us to focus on the
development of simplified-but-effective maps, rather than on maps that are highly
detailed but impractical to use.
167
4.3 The role of the Lay epistemology model
Another feature of the constructivist analysis we propose consists of collecting and
analysing data through the use of the conceptual framework of the categories
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postulated by the Lay epistemology model. Unlike Kruglanski and Ajzen, however, we
do not give up the investigation of situational facts determining the availability and
salience (factor (A2) in their model) and determining the preference for some desirable
conclusions (factor (B3)). Moreover, we pay special attention to the background
knowledge of the subject (factor (A1)).
Kruglanski and Ajzen consider the analysis of these factors unmanageable because
of their potentially inexhaustible variety. We believe, however, that this analysis is
feasible if, by means of idiographic studies, we limit the ambitions of our research to a
specific problem as, for example, the study of formal decision-making processes of a
specific investor or of a specific group of investors.
We believe that, for such specific problems, we can create sufficiently useful and
simplified maps. We use the term map in the sense introduced at the beginning of this
article, therefore not as a definitive, “real” or complete representation of reality but as
useful tools to lead you along a stretch of land.
We are aware that, in analysing factors that Kruglanski and Ajzen feel
unmanageable, we are introducing a methodologically questionable element of
arbitrariness: in the study of situational factors that determine a process of investment
decision, the personal evaluation of those who make the analysis concerning the
relevance (or otherwise) of an item over another, involves a certain amount of
non-reproducibility of the analysis. And this, as mentioned above, is a problem from
the methodological point of view.
In our perspective, however, the analysis of an investor’s process of construction of
reality can only be done by abstracting prejudicially some elements of the process. And
we believe that the quality (utility) of an analysis should not be measured on the basis
of its conventionality, but on its acuity (in our case, on the basis of the changes that the
analysis enables us to make in our investment decision-making process):
Quite generally, our knowledge is useful, relevant, viable, [. . .] if it stands up to experience
and enables us to make predictions and to bring about or avoid, as the case may be, certain
phenomena (von Glasersfeld, 1984, p. 19).
We can summarize using a metaphor: during the Italian Renaissance, in the city of
Florence (like also in The Netherlands), were concentrated cartographers, whose
reputation was much better than that of others who worked in other cities. Their maps
were considered by travellers more useful than others because they reported
abstractions (each sign on a map is an abstraction) that the users of the maps
considered more useful for their purposes.
 QRFM 4.4 Developing a critical investment decision maker
3,3 This methodological approach is better suited to serve a decision maker rather than a
researcher in decision making. In this sense, the study of breaking and releasing
mechanisms that determine a specific investment decision-making process enables
decision makers to influence Breaking and releasing mechanisms. We introduce the
term “critical or reflective thinking” to refer to a thought that reflects on the constraints
168 and limits of what it can learn, depending on the language and the cognitive process
adopted. We can therefore name critical (or reflective) investment decision maker that
decision maker who, through the constructivist perspective, achieves a greater
(constructivist) understanding of his own decision-making process.
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5. Examples
5.1 The asset valuation processes of value investors
This section gives some examples of possible applications of the constructivist
perspective to the study of formal investment decision-making processes.
The purpose of the examples, as well as to stimulating the interest of other
researchers in the modelization we propose, is to indicate the directions of our current
research.
The formal decision-making processes of professional investors are numerous, and
they are organized in accordance with the different assets they invest in, the
investment style they adopt, the peculiarities of the investment markets, and so forth.
They include therefore several families of different formal processes.
Consistent with our passion for simple maps, which are useful for practical, specific
purposes, we decided to give examples of something that concerns us, from an
operational point of view. The examples we propose refer to the formal decision-making
processes of a particular type of investors, namely of value investors (for an introduction
to value investing, see, e.g. Greenwald et al., 2001). This category of formal
decision-making processes has been chosen as an example as one of the two authors of
this article uses them daily as asset manager.
More specifically, the examples refer to the formal processes of investment in equity
and bond portfolios, based on the conceptual framework of “Graham and Dodd
investing”, more commonly known as of “value investing”. In particular, they refer to
the value investing models of assets valuation. However, we believe that our approach
may also be relevant to other formal processes of investment and asset valuation.

5.2 A brief introduction to value investing

In order to facilitate understanding even to the readers who are unfamiliar with this
field, we would like to precede the examples with a brief description of the evolution of
formal procedures of asset valuation developed by value investors from Graham and
Dodd, via Buffet, up to Greenwald’s recent developments.
As illustrated, for example, by Greenwald et al. (2001), the models of asset valuation
used by value investors have evolved over time. We can remind the reader that the first
formulation given by Graham and Dodd (1934) focuses on guiding the choice
of investment in securities based on an estimate of the intrinsic value of the
underlying assets. This strategy produced investments with above-average returns
(Browne et al., 2009).
 In the value perspective, estimating the value of an asset is a process that proceeds Investment
by approximations. Among the first approximations of the value of an asset used by decision making
value investors, the liquidation value of an asset was, for a certain period of time, a
useful estimate. Graham and Dodd suggested buying shares (and bonds) at a lower
price than the liquidation value of the underlying assets. The liquidation value was
often approximated by calculating the sum of “current assets less total liabilities”,
Graham’s so-called “net-net” value. 169
Over time, however, the chances of finding “net-net” securities on the market
became slimmer and slimmer, until they became practically unavailable. This
probably happened because of the spread of data collections as S&P stock guide and
value line at first, and then of digital database, and at the same time due to the increase
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in the number of investors who used this strategy.

The value investors, therefore, had to evolve first towards a less restrictive value
estimate, that included the value attributed to the ability of a company to generate
profits in the future (earning power value), and then towards an even more enlarged
estimate, that included the value attributed to the possibility of future growth of those
profits (earning power value plus growth). This conceptual evolution has been carried
out primarily by Warren Buffett, one of Graham’s students, and by a group of
professional investors he gathered in the Buffett Group (besides the aforementioned
Greenwald, see, e.g. Lowenstein, 1995; Schroeder, 2008).
In the evolution of asset valuation models from the liquidation value to the earning
power value plus growth, value investors have had to equip themselves with cultural
tools to estimate the earning power of a company and growth quality and sustainability.
Buffett and others (developing some of Philip Fisher’s ideas) have provided them with
the technical constructs of “franchise” and “moat”, and of “growth within a franchise”.
These constructs were summarized and interconnected by Greenwald in two books: one
dedicated to the “value” valuation model (Greenwald et al., 2001) and the other to the
constructs that allow us to analyse the stability of the “earning power” and the good
quality of the growth (through an analysis of the competition in the sector where the
company operates) (Greenwald and Kahn, 2005).
To date, competition analysis models (among companies) and the resulting
valuation models summarized by Greenwald are a living corpus of constructs and
applications shared by the value investors’ community. Like any community of
practice, value investors use these constructs in their investment decision processes
and modify them through daily use.

5.3 Outline of application to value investing

Consistent with what we have proposed in this article, we can study these constructs
and the reality-making processes associated with them, from a constructivist
perspective. Economic literature that deals with value investing, already attests to the
use of these constructs by financial operators. In the literature, moreover, authors, such
as the aforementioned Greenwald, offer ideas and theoretical concepts for developing
such constructs. What can the constructivist perspective add to such studies?
The value-added feature of the constructivist study of formal decision-making
processes of value investors is, in our opinion, that it looks at their constructs and at
their reality-making processes with a different degree of realism and from a different
perspective.
 QRFM We can describe the traditional economic studies in the value-investing models of
3,3 asset valuation as “conversations among experts”. In a conversation among experts
(a conversation among economists discussing economic constructs), experts tend to take
constructs for granted. They do not treat them as systems of beliefs but as real facts.
The characteristics of a constructivist view are:
.
the ability of those who adopt it to problematize the constructs and the cognitive
170 processes used by individuals;
.
the ability to show the reality the subjects believe they live in as a “construction”;
and
.
the ability to highlight, by means of a reflective analysis, the processes of
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construction of certain constructs, and the incidental factors that keep them alive.

A constructivist analysis of the formal process of decision of a value investor is thus very
similar to the study of a science historian of the scientific texts, the statements and the
daily activities of a scientist or of a group of scientists. Such work will focus its analysis
on the evolution and the historical filiation of the constructs. Through the analytical grid
of lay epistemology model, it will highlight the sociological-environmental-cultural
context and the daily practices in which certain constructs are generated and survive.
Again, a scholar (as well as a value investor, when he plays the role of the
researcher) studies his discipline using his constructs and his cognitive processes, but
if he adopts a constructivist perspective, he does so looking at both aspects with a
critical eye. Better still, he does it with a critical and reflective eye, like that of the
researcher who knows epistemology and sociology of science. He does it with a critical
eye that makes him aware of the dimensions of reality constructed on certain premises,
premises he otherwise usually stated without judging them. As Goffman (1974, p. 85)
argued: “[. . .] a correct view of a scene must include the viewing of it as part of it”.
The setting of the research from a constructivist perspective is instrumental in
developing a critical (or reflective) value investing in regards to the formal processes of
decision making.

5.4 Three examples of possible research

We come now to three specific examples of possible research in this perspective.
(1) Analysis of the construct of intrinsic value of an asset. When a critical value
investor studies value investing, he considers the community of his colleagues as a
community of practice, which lives in the “world of value investing”, dealing with
“non-real” elements as intrinsic value construct.
A value investor, who did not adopt such a critical perspective, could consider the
concept of “intrinsic value” as real. A critical value investor, instead, treats it as a
construct, and reflects on this constructed dimension and on his cognitive, social and
environmental processes[3].
Embracing this modelization, value investing (with its asset valuation processes)
can be seen as the reality-making process of a community of investors, that is to say,
something that is not true in itself, but shared for specific purposes. The intrinsic value
of an asset estimated by value investor becomes a cultural artefact. This artefact can be
shared by other members of the same “tribe” and has a practical value because it offers
a psychological protection from the uncertainty caused by the ever changing prices in
the stock market, and not because it indicates the “true” value which the market price
 should match. Such a cultural artefact can be considered effective in terms of Investment
investment performances, probably because recurrently other “tribes” of investors decision making
temporarily abandon their own cultural artefacts (embittered by their negative
performances), and rely on the artefact of value investors in order to determine the
market price of a security.
This feature of “cultural artefact of last resort”, combined with the psychological
defence that the construct of intrinsic value gives the value investor when facing the 171
uncertainty of the market, is a constructivist reading. It is useful, for example, as
explanatory hypothesis and as a starting point for research into the higher
performances shown by value investing over a quite long period of time.
(2) Analysis of the construct of intrinsic value in Benjamin Graham. The analysis of
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the construct of intrinsic value from a constructivist perspective can be further

explored by examining how individual professional investors use it, and by drawing a
comparison between constructs with a similar name used by different investors
(or by the same investor in different historical periods).
By way of example, Benjamin Graham (1974, pp. 1-2) indicates that “in many – but
by no means in all – cases, a dependable range of valuation can be established” and
that “market itself will vindicate [this range of valuation] after an interval that
averages not too long for human patience – say, three years or less”.
From the reading of these two passages (and of his other writings of the same
period) from a constructivist point of view seems to follow that here Graham is not
interested in an intrinsic value as an intrinsic property of the valued asset. He is rather
interested in a range of values towards which the judgement of the other investors can
reasonably be converging over the next three years, once the emotional conditions that
today result in a depressed price for the asset disappear.
This “dependable range of valuation” is seen by Graham as very wide because of
the different degree of prejudice about the future that different investors may have
when valuing the same “normal current earning” and because of the subsequent choice
of different multipliers for these earnings.
Graham is willing to accept the prejudice of the market when it prices an asset at
any point within this range and to reject the prejudice of the market when it prices an
asset out of this “reasonable” valuation range.
Such a construct of intrinsic value is profoundly different from, for example, the one
used by some investors who use the discounted cash flow model to value an asset.
Even with different facets, they tend to look for an intrinsic value as an intrinsic
(objective) property of the asset being valued. The uncertainty of the variables needed
to estimate the value of an asset with the discounted cash flow model often leads those
using it to opt for the estimation of a range of values. From a constructivist point of
view, however, this range of values may not necessarily coincide with the construct
“range of values” mentioned by Graham (1974). It is not the same construct every time
the investor who uses the discounted cash flow model believes that the true value is
located “somewhere” (in a precise point) within that range, rather than considering the
range as a prejudice range asserted by the market (by other investors).
In order to better distinguish these two different constructs of intrinsic value we can
point to that adopted by the user of the discounted cash flow model as characterized by
a monist (or sometimes hypothetical) realism, and the one used by Graham as
characterized by a conceptual realism.
 QRFM The terms monist realism, hypothetical realism and conceptual realism, belonging
3,3 to epistemological literature (Salvini, 1988), denote three different concepts of reality.
If we take a perspective of monist realism, we consider the existence of a single reality,
objectively given, knowable and placed outside the observer: reality pure and simple,
that can be grasped by the observer through the use of increasingly sophisticated
research techniques.
172 From a perspective of hypothetical realism, reality is still a given one, but it is
essentially unknowable except through the use of theories that will give us a somewhat
limited and reflected picture of it. From the perspective of conceptual realism, the
monolithic, dogmatic reality peculiar to monist and hypothetical realism disappears.
From this viewpoint, there is a multiplicity of realities, generated within different
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socio-situational and cultural contexts, and “implicit or explicit theories held by

individuals, while they explain or interpret reality, basically do nothing but produce
another one” (Salvini, 2004, p. 33, our translation).
Back to the field of value investing, value investors different from Graham can use
constructs of intrinsic value significantly different from each other. Graham himself
seems to have made use of partially different constructs in different passages of his
writings and in different moments of his career[4]. Still remaining among the authors
cited above, the construct of intrinsic value adopted for example by Greenwald et al.
(2001) seems to be characterized by hypothetical realism (search for a defined intrinsic
value, which Greenwald tries to approximate by different degrees of uncertainty)
different from conceptual realism employed by Graham (1974).
(3) Field study of the interactions between constructs and environment where
decisions are made. Still relying on the constructivist modelization of the value
investors’ activity, presented in the first example, we can analyse the process that has
led some present-day value investors to produce the constructs of earning power value,
of franchise, of moat, and of growth within a franchise. We can then study how these
reality constructs are kept alive in the daily practice of different value investors, and
finally explore the possibility of constructing them on different bases or in different
ways. In the case of Greenwald and Kahn (2005), for example, we can analyse the
interconnections between the constructs and belief systems about competition between
companies in the same sector, which the author embraces, and the asset valuation
models that he intends to adopt. We can also analyse how, in the daily activity of asset
valuation, the availability of some or other information about companies (availability
and salience) contributes to keeping these constructs alive. We can therefore analyse
these constructs and their interactions with the everyday environment where investors
form their own judgments.
To sum up, a constructivist study of the investment decision process, in both a
nomothetic and an idiographic direction, tends (unlike other economic studies of
different approach) to highlight certain macro factors and cognitive contents. In so
doing, it does not select them on the basis of the criterion of conventionality of analysis,
but on the criterion of producing an insightful analysis, namely on their pragmatic
effects.
On a constructivist map of a decision-making process, we will see this kind of
“roads” and “signs”. They are not there to say that the territory is made of only those
macro factors and cognitive contents, but they appear as a cartographic abstraction,
something useful to make a certain journey – and that journey only – easier: namely
 the journey of those who are interested in seeing certain places and in having certain Investment
meetings, since, according to the approach we propose, each map is a different journey decision making
(Figure 1).
The main ideas expressed in this article are listed below:
(1) Constructivist perspective:
.
constructivist epistemology; 173
.
theoretical pluralism and cognitive pragmatism;
.
constructivist modelizzation; and
.
criterion of pragmatic usefulness of a modelization.
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(2) The many possible constructivist modelizations.

(3) Lay epistemology model:
.
epistemic sequence;
.
if-then linkages;
.
breaking and releasing mechanisms;
.
variety of situational factors;
.
nomothetic study of macro factors affecting the epistemic breaking and
releasing; and
.
idiographic study of the cognitive contents and situational factors (what the
lay epistemology model omits).
(4) Not a matter of elegance of the method, but of usefulness of the analysis:

Adopting a
Constructivist
epistemology

Other possible modelizations of investment

Adopting a Constructivist decision making compatible with a
modelization constructivist epistemology but actually
based on different epistemological premises:
e.g. Heuristic-and-bias modelization;
Adopting the Lay Other constructivist Neuroeconomy modelization; etc.
epistemology model modelizations: e.g.
framework Discoursive modelization;
Narrative modelization; etc.

Choosing an Idiographic Nomothetic study of

study of the cognitive macrofactors, e.g.
contents and macrofators Kruglanski

Studying formal Describing Figure 1.

decision making decision making
in the field
Our current research into
processes of
specific value the field of “Investment
investors decision making from a
constructivist perspective”
Note: Only one of the possible forms of the constructivist approach
 QRFM .
the same instruments of ethnographic and cognitive-historical analysis;
3,3 .
criterion of acuity (and utility) of analysis vs criterion of conventionality of
analysis; and
.
critical (or reflective) investment decision maker.
(5) An example of possible applications: formal aspects of asset valuation in value
174 investing:
.
a brief reference to the issue of asset valuation in value investing;
.
critical (or reflective) value investor; and
. three specific examples of possible studies from a constructionist
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perspective.
(6) Conclusion: each map is a different journey.

Notes
1. In this paper, we frequently use the word “modelization” instead of the more common word
“model” to highlight that, in our perspective, a model is always an act of construction made
by someone.
2. Kruglanski and Ajzen (1983, p. 13, Note 2) deal with both analogy and induction as special
cases of deduction.
3. Paying tribute to Graham and Dodd’s (1934) merit, we must stress that they implicitly seem
to adopt such a critical perspective since their 1934 work, probably as a result of an attitude
of philosophical skepticism that Graham (at least) embraced.
4. For an in-depth analysis, we refer to our work on the subject, currently in preparation.

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About the authors

Carlo Massironi is senior analyst at Studio Massironi Consulenza Finanziaria, a financial
advisory firm, in Garda, Italy. Carlo Massironi is the corresponding author and can be
contacted at: [email protected]
Marco Guicciardi is a Professor in the Department of Psychology at Cagliari University, Italy.

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