Ratings and Asset Allocation: An Experimental Analysis

Robert L. McDonald and Thomas A. Rietz

No 25046, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Investment ratings (e.g., by Morningstar) provide a simple ordinal scale (e.g., 1 to 5) for comparing investments. Typically, ratings are assigned within categories — groups of assets sharing common characteristics — but using the same ordinal scale for all groups. Comparing such categorized ratings across categories is potentially misleading. We study the effect of categorized ratings in an asset allocation experiment in which subjects make repeated allocation decisions under complete information. Subjects initially see no ratings, and they then see either categorized or uncategorized ratings. Although ratings convey no information, categorized ratings affect subject investment choices and harm performance in the experiment. Subjects do not simply invest more in highly rated assets. Rather, rating effects seem to occur when ratings conflict with subjects’ own evaluation of assets: subjects reduce their investment in a high quality asset which receives an intermediate rating, but they do not increase their investment in a high-quality asset that receives a high rating. Knowledge and experience help with the base allocation task but do not mitigate the harmful effect of categorized ratings.

JEL-codes: G4 G41 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-exp
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w25046.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25046

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25046

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().