Communicating Asset Risk: How Name Recognition and the Format of Historic Volatility Information Affect Risk Perception and Investment Decisions

14 Pages Posted: 17 Nov 2008 Last revised: 31 Aug 2011

See all articles by Elke U. Weber

Elke U. Weber

Princeton University - Department of Psychology

Niklas Siebenmorgen

University of Mannheim

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

An experiment examined how the type and presentation format of information about investment options affected investors' expectations about asset risk, returns, and volatility and how these expectations related to asset choice. Respondents were provided with the names of 16 domestic and foreign investment options, with 10-year historical return information for these options, or with both. Historical returns were presented either as a bar graph of returns per year or as a continuous density distribution. Provision of asset names allowed for the investigation of the mechanisms underlying the home bias in investment choice and other asset familiarity effects. Respondents provided their expectations of future returns, volatility, and expected risk, and indicated the options they would choose to invest in. Expected returns closely resembled historical expected values. Risk and volatility perceptions both varied significantly as a function of the type and format of information, but in different ways. Expected returns and perceived risk, not predicted volatility, predicted portfolio decisions.

Keywords: Behavioral finance, home bias, portfolio decisions, risk perception, volatility forecasts

Suggested Citation

Weber, Elke U. and Siebenmorgen, Niklas and Weber, Martin, Communicating Asset Risk: How Name Recognition and the Format of Historic Volatility Information Affect Risk Perception and Investment Decisions (2005). Risk Analysis, Vol. 25, No. 3, 2005, Available at SSRN: https://ssrn.com/abstract=1301079

Elke U. Weber (Contact Author)

Princeton University - Department of Psychology

Green Hall
Princeton, NJ 08540
United States

Niklas Siebenmorgen

University of Mannheim ( email )

68131 Mannheim
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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