The Impact of Choice Architecture on Portfolio Allocations: Experimental Evidence

Abstract

We analyze whether choice architecture improves investors' financial decision-making in an investment experiment. To this end, we implement a 2x2 factorial design where we test the effect of presentation format (graphical vs. tabular) and reduction of complexity (asset selection vs. predefined portfolios) on decision-making quality and investment performance. Overall, our results suggest a differential effect of presentation format and complexity reduction: First, we find that a graphical presentation format lowers decision-making quality when the environment is more complex (asset selection). Second, within graphical presentation, decision-making quality is higher when the decision situation is simplified (predefined portfolios). In addition, we find that a simplified decision environment leads to higher risk-adjusted returns and reduces the relevance of fluid intelligence and numeracy for decision-making quality.

Keywords: Investment Decision, Presentation Format, Choice Architecture, Decision-Making Quality, Experimental Finance

JEL Classification: G11, G41, G50