Framing Effects and Risk Perception: Testing Graphical Representations of Risk for the KIID

Abstract

In this paper we analyze which graphical representation of risk is most effective in supporting investors to assess the risk and return characteristics of a fund. Moreover, we test on which criteria the investors base their risk taking behavior. To this end we compare return bar charts and price line charts, combined with some additional information such as a risk scale or a gain and loss range.

We find that the risk communication with bar charts performs relatively well, except with regard to communicating the possibility of losses. Furthermore, we find that people generally underestimate risks and overestimate return. We additionally find that risk perception has the strongest influence on risk taking behavior, and in particular that a higher risk perception leads to less risk taking.

Keywords: risk communication, risk perception, risk comparability, risk awareness, loss aversion, performance path influence, risk taking behavior, graphical communication, KIID

JEL Classification: C93, G11