Focusing on volatility information instead of portfolio weights as an aid to investor decisions

Christian Ehm, Christine Laudenbach () and Martin Weber
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Christian Ehm: University of Mannheim
Christine Laudenbach: Goethe University Frankfurt

Experimental Economics, 2018, vol. 21, issue 2, No 9, 457-480

Abstract: Abstract When faced with the challenge of forming a portfolio containing a risky and a risk-free asset, investors tend to apply the same portfolio weights independently of the volatility of the risky asset. This “percentage heuristic” can lead to different levels of portfolio risk when the same investor is presented with a more or a less risky asset. Using four experiments, we show that asking investors to choose the return distribution for their portfolio while keeping the exact portfolio weights unknown leads to greater similarity in levels of portfolio volatility (across different levels of risk of the risky asset) than asking investors to choose this distribution while additionally facing the portfolio weights. Higher consistency in risk taking is obtained both between and within test subjects.

Keywords: Risk taking; Volatility inadaptability; Asset allocation; Experience sampling; Risk perception (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10683-017-9537-0

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