Ratings and Asset Allocation: An Experimental Analysis

61 Pages Posted: 3 May 2013

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2013

Abstract

Financial product ratings are intended to summarize relevant information in a manner that assists in decision-making. Ratings, however, have the potential to be either helpful or harmful. Ratings are often assigned within categories; ratings across categories then may or may not be comparable. We experimentally assess the effect of ratings in a setting where subjects repeatedly make investment decisions, there is minimal computational burden, and at all times subjects have complete information about the characteristics of the investments. Ratings supply no additional information, but categorized ratings affect investment decisions and harm performance. More knowledgable subjects make better decisions, but are also affected by categorized ratings. The effects are largely reversed when ratings no longer appear.

Keywords: behavioral finance, investment decisions, ratings

JEL Classification: C91, G11

Suggested Citation

McDonald, Robert L. and Rietz, Thomas A., Ratings and Asset Allocation: An Experimental Analysis (April 30, 2013). Available at SSRN: https://ssrn.com/abstract=2259327 or http://dx.doi.org/10.2139/ssrn.2259327

Robert L. McDonald (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

Thomas A. Rietz

University of Iowa - Henry B. Tippie College of Business ( email )

C108 PBB, Suite S244
Iowa City, IA 52242-1994
United States
319-335-0856 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://tippie.uiowa.edu/people/profile/profile.aspx?id=195021

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