Journal Article

The Role of Experience Sampling and Graphical Displays on One's Investment Risk Appetite

Haisley, Emily, Weber, Martin, Kaufmann, Christine

2013

Overview

Financial professionals have a great deal of discretion concerning how to relay information about the risk of financial products to their clients. This paper introduces a new risk tool to communicate the risk of investment products, and it examines how different risk-presentation modes influence risk-taking behavior and investors' recall ability of the risk-return profile of financial products. We analyze four different ways of communicating risk: (i) numerical descriptions, (ii) experience sampling, (iii) graphical displays, and (iv) a combination of these formats in the \"risk tool.\" Participants receive information about a risky and a risk-free fund and make an allocation between the two in an experimental investment portfolio. We find that risky allocations are elevated in both the risk tool and experience sampling conditions. Greater risky allocations in the risk tool condition are associated with decreased risk perception, increased confidence in the risky fund, and a lower estimation of the probability of a loss. In addition to these favorable perceptions of the risky fund, participants in the risk tool condition are more accurate on recall questions regarding the expected return and the probability of a loss. We find no evidence of greater dissatisfaction with returns in these conditions, and we observe a willingness to take on similar levels of risk in subsequent allocations. This paper was accepted by Teck Ho, behavioral economics.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Analysis / Appetite / Asset allocation / Behavior / Communication / Decision making / Ecological momentary assessment / Entscheidung unter Risiko / Expected returns / Experience / experience-description gap / Experiments / Financial information / Financial investments / Financial portfolios / Financial risk / Financial risks / Finanzprodukt / Information management / Initiatives / Investment decisions / Investment funds / Investment goods / Investment risk / Investments / Investors / Management / Portfolio analysis / Portfolio-Management / Portfolios / presentation format / Probability / Recall / Risk / Risk aversion / Risk behavior / Risk communication / Risk management / Risk perception / Risk taking / Risk-taking (Psychology) / Sampling / Securities markets / Simulation / Simulations / Stock exchanges / Studies / Western Europe