Do Risk Simulations Lead to Persistently Better Investment Decisions?

40 Pages Posted: 9 May 2015 Last revised: 12 Jul 2016

Meike Bradbury

University of Zurich - Department of Banking and Finance

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute (Zurich Center)

Stefan Zeisberger

Radboud University Nijmegen

Date Written: July 12, 2016

Abstract

Risk simulations based on experience sampling were found to significantly improve initial investment decisions. We analyze the advantages and limitations of risk simulations in a setting in which investors can adjust their investment strategy before the end of the investment horizon. Our experimental results underscore the positive effects of risk simulations on investors’ understanding of the risk-return trade-off. Furthermore, we find that investors who are informed via description require multiple investment periods until they show stable average risk-taking behavior and similar allocations to the risky asset as investors informed via risk simulations. We do not find any effects of initial simulation-based learning on investors’ trading volume or trading behavior with regard to previous investment outcomes.

Keywords: Behavioral finance, simulated experience, experience sampling, investment decision, risk communication, financial advice

JEL Classification: D81; G11

Suggested Citation

Bradbury, Meike and Hens, Thorsten and Zeisberger, Stefan, Do Risk Simulations Lead to Persistently Better Investment Decisions? (July 12, 2016). Available at SSRN: https://ssrn.com/abstract=2603780 or http://dx.doi.org/10.2139/ssrn.2603780

Meike Bradbury

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

Schönberggasse 1
Zürich, 8001
Switzerland

Thorsten Hens

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

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute (Zurich Center)

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Stefan Zeisberger (Contact Author)

Radboud University Nijmegen ( email )

Nijmegen, 6500 HK
Netherlands

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