As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures

Hazel Bateman, Loretti Dobrescu, Ben R. Newell, Andreas Ortmann and Susan Thorp
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Hazel Bateman: School of Risk and Actuarial Studies, University of New South Wales
Ben R. Newell: School of Psychology, University of New South Wales

No 326, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using ‘user-friendly’ information prescribed by regulators. We demonstrate that choices of more than 20% of participants cannot be predicted using any of the prescribed information items but that 30% of participants used all, or almost all, items, frequently in unexpected ways. A pie-chart showing asset allocation had the largest marginal impact on investment choices. Participants preferred options with more segmented pies (lower concentration) and with equally sized segments (lower deviation froma 1/n allocation). This choice behavior is consistent with the application of a simple diversification heuristic. Participants cannot choose more than one investment but are guided by the extent to which a pre-mixed investment option appears evenly balanced across asset classes. This novel application of a 1/n strategy is distinct from existing findings of naïve diversification in ‘mix-it-yourself’ conditions where participants spread resources evenly across funds or categories. The results highlight that information contained in prescribed investment disclosures may not be used in the manner intended by the regulator. The results also pose interesting methodological questions about the way ‘user-friendly’ information prescribed by regulators is validated before being legislated.

Keywords: consumer finance; diversification heuristics; pensions; choice experiment (search for similar items in EconPapers)
JEL-codes: C91 D14 G02 G11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013-03-01
New Economics Papers: this item is included in nep-age, nep-cbe, nep-dcm and nep-exp
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Published as: Bateman, H., Dobrescu, I., Newell, B. R., Ortmann, A. and Thorp, S., 2016, "As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures", Journal of Economic Behavior & Organization, 121, 60-76.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp326.pdf (application/pdf)

Related works:
Journal Article: As easy as pie: How retirement savers use prescribed investment disclosures (2016)
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