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Nudging against panic selling: Making use of the IKEA effect

Amin Zokaei Ashtiani, Marc Oliver Rieger and David Stutz

Journal of Behavioral and Experimental Finance, 2021, vol. 30, issue C

Abstract: A typical behavioral pattern of investors is to reduce stock market exposure after a crash. This leads to a typical “buy high, sell low” strategy that is detrimental to long-run wealth accumulation. We suggest a simple nudge based on the IKEA effect and the endowment effect that reduces this problem substantially: actively involving investors in the selection process of the risky investments, while restricting their selections in a way that preserves a large degree of diversification. The “self-assembled” portfolio is, indeed, less likely to be sold off: in an experiment with N=219 university students, we show that this nudge reduces panic selling significantly. In fact, it makes a difference that is at least as big as the difference between experienced and inexperienced investors.

Keywords: IKEA effect; Endowment effect; Familiarity bias; Household finance; Strategic asset allocation; Behavioral biases; Nudging (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G41 G5 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jbef.2021.100502

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