Does Presenting Investment Results Asset by Asset Lower Risk Taking?

Abstract

We examine how the presentation of investment results affects risk taking using an experiment in which participants view results either asset by asset or aggregated into a portfolio result. Our experiment examines the investment choices of a nationwide sample of 249 participants in a simulation of investing for retirement. Segregating investment results by asset decreases subsequent risk taking. Those presented segregated results lower their equity proportion by 4.21% and their portfolio volatility by 0.88%. Both decreases are 8% of the mean levels of risk taking, 50.59% and 10.85% respectively. At the beginning of the simulation, we present historical results of the investment options either asset by asset or aggregated into portfolios. Among the small number of participants who spend a significant amount of time studying these historic results, segregating results lowers their equity proportion by 9.81%. Our results are a challenge to fully rational theories of investment choice, but are consistent with a combination of three aspects of prospect theory based models: loss aversion, narrow framing of individual-asset results, and diminishing sensitivity to aggregated gains and losses. Our experiment never varies the presentation of investment results across time, thus our results are distinct from the effect of myopic loss aversion.

Keywords: risk taking, experiment, prospect theory, loss aversion, narrow framing, diminishing sensitivity, myopic loss aversion

JEL Classification: C9, G11