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Focusing on volatility information instead of portfolio weights as an aid to investor decisions

Author

Listed:
  • Christian Ehm

    (University of Mannheim)

  • Christine Laudenbach

    (Goethe University Frankfurt)

  • Martin Weber

    (University of Mannheim and CEPR London)

Abstract

When faced with the challenge of forming a portfolio containing a risky and a risk-free asset, investors tend to apply the same portfolio weights independently of the volatility of the risky asset. This “percentage heuristic” can lead to different levels of portfolio risk when the same investor is presented with a more or a less risky asset. Using four experiments, we show that asking investors to choose the return distribution for their portfolio while keeping the exact portfolio weights unknown leads to greater similarity in levels of portfolio volatility (across different levels of risk of the risky asset) than asking investors to choose this distribution while additionally facing the portfolio weights. Higher consistency in risk taking is obtained both between and within test subjects.

Suggested Citation

  • Christian Ehm & Christine Laudenbach & Martin Weber, 2018. "Focusing on volatility information instead of portfolio weights as an aid to investor decisions," Experimental Economics, Springer;Economic Science Association, vol. 21(2), pages 457-480, June.
    • Handle: RePEc:kap:expeco:v:21:y:2018:i:2:d:10.1007_s10683-017-9537-0
    DOI: 10.1007/s10683-017-9537-0
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    Cited by:

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    3. Xiu Chen & Fuhai Hong & Xiaojian Zhao, 2020. "Concentration and variability of forecasts in artificial investment games: an online experiment on WeChat," Experimental Economics, Springer;Economic Science Association, vol. 23(3), pages 815-847, September.

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    More about this item

    Keywords

    Risk taking; Volatility inadaptability; Asset allocation; Experience sampling; Risk perception;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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