Investment Decisions and Time Horizon: Risk Perception and Risk Behavior in Repeated Gambles

Management Science, Vol. 51, pp. 1777-1790, 2005

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

See all articles by Alexander Klos

Alexander Klos

University of Mannheim - Department of Business Administration and Finance, especially Banking

Elke U. Weber

Princeton University - Department of Psychology

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: 2005

Abstract

To investigate the effect of time horizon on investment behavior, this paper reports the results of an experiment in which business graduate students provided certainty equivalents and judged various dimensions of the outcome distribution of simple gambles that were played either once or repeatedly for 5 or 50 times. Systematic mistakes in the ex-ante estimations of the distributions of outcomes after (independent) repeated plays were observed. Despite correctly realizing that outcome standard deviation increases with the number of plays, respondents showed evidence of Samuelson's (1963) fallacy of large numbers. Perceived risk judgments showed only low correlations with standard deviation estimates, but were instead related to the anticipated probability of a loss (which was overestimated), mean excess loss, and the coefficient of variation. Implications for future research and practical implications for financial advisors are discussed.

Suggested Citation

Klos, Alexander and Weber, Elke U. and Weber, Martin, Investment Decisions and Time Horizon: Risk Perception and Risk Behavior in Repeated Gambles (2005). Management Science, Vol. 51, pp. 1777-1790, 2005, Available at SSRN: https://ssrn.com/abstract=1301228

Alexander Klos

University of Mannheim - Department of Business Administration and Finance, especially Banking ( email )

L 5, 2
D-68131 Mannheim
Germany

Elke U. Weber (Contact Author)

Princeton University - Department of Psychology

Green Hall
Princeton, NJ 08540
United States

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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