Sometimes Less Is More – The Influence of Information Aggregation on Investment Decisions

34 Pages Posted: 12 Oct 2012 Last revised: 14 Aug 2013

See all articles by Christine Laudenbach

Christine Laudenbach

Goethe University Frankfurt

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: June 26, 2013

Abstract

We study the effect of information aggregation on individual investors’ risk-taking behavior in two experiments, each having three different treatments. Subjects in the control group were given hypothetical returns for both the risk-free and the risky asset. Subjects in the account group were also given information about returns separately for each of the two assets. However, this information was scaled according to a subject’s chosen investment amount. Subjects in the portfolio group could observe returns on a portfolio level, which constitutes the highest level of information aggregation in our study. Results show that a higher degree of information aggregation results in greater risk-taking. Increased risk-taking is associated with a lower risk perception and a more accurate estimation of the probability of a loss. Furthermore, reporting aggregated returns might lead investors to evaluate the aggregated outcome relative to a different reference point (the overall portfolio instead of the amount invested in risky assets), which makes them less likely to experience a loss and therefore increases the willingness to invest in the risky asset. Thus, aggregating information seems to reduce mental accounting, namely having one account for risky and one account for risk-free investments. Ex post, our findings show that the portfolio group also makes consistent subsequent allocation decisions and shows a lower dissatisfaction with outcomes in the loss domain. The results were consistent across both experiments despite the use of different subject pools and investment amounts.

Keywords: risk taking, investment decision, information aggregation, framing

JEL Classification: G11

Suggested Citation

Laudenbach, Christine and Weber, Martin, Sometimes Less Is More – The Influence of Information Aggregation on Investment Decisions (June 26, 2013). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2159648 or http://dx.doi.org/10.2139/ssrn.2159648

Christine Laudenbach (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt, 60323
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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