Impressed by Numbers: The Extent to Which Novice Investors Favor Precise Numerical Information in a Context of Uncertainty
69 Pages Posted: 4 Jun 2020 Last revised: 11 Dec 2020
Date Written: May 7, 2020
Society is riddled with uncertainty, but uncertainty is often poorly communicated to decision-makers. Novice investors are particularly vulnerable to this as they are often shown future returns with misleadingly high levels of precision. We test the hypothesis that consumers are impressed by numbers – i.e. offset the uncertainty in investment decisions by over-relying on precise numerical information. Six incentivized experiments compared decisions when expected growth is presented in point estimates as opposed to ranges. Consumers prefer and invest more in point estimates, particularly when the range features a larger width or a potential loss. This is because point estimates are associated with certainty and therefore give consumers more confidence. This effect holds when consumers are made aware that performance is variable and expected growth is not guaranteed, which shows the limits of current financial communications. On the other hand, experiencing discrepancies between expected and actual growth dissipates the preference for point estimates. Although consumers favor seemingly precise numerical information, we find conditions under which this bias can be alleviated and open promising avenues for effective interventions.
Keywords: financial communication, investment decision, forecasts, ambiguity
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