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As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures

Author

Listed:
  • Hazel Bateman

    (School of Risk and Actuarial Studies, University of New South Wales)

  • Isabella Dobrescu

    (CEPAR and School of Economics, University of New South Wales)

  • Ben R. Newell

    (School of Psychology, University of New South Wales)

  • Andreas Ortmann

    (School of Economics, University of New South Wales)

  • Susan Thorp

    (University of Sydney)

Abstract

We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using ‘user-friendly’ information prescribed by regulators. We demonstrate that choices of more than 20% of participants cannot be predicted using any of the prescribed information items but that 30% of participants used all, or almost all, items, frequently in unexpected ways. A pie-chart showing asset allocation had the largest marginal impact on investment choices. Participants preferred options with more segmented pies (lower concentration) and with equally sized segments (lower deviation froma 1/n allocation). This choice behavior is consistent with the application of a simple diversification heuristic. Participants cannot choose more than one investment but are guided by the extent to which a pre-mixed investment option appears evenly balanced across asset classes. This novel application of a 1/n strategy is distinct from existing findings of naïve diversification in ‘mix-it-yourself’ conditions where participants spread resources evenly across funds or categories. The results highlight that information contained in prescribed investment disclosures may not be used in the manner intended by the regulator. The results also pose interesting methodological questions about the way ‘user-friendly’ information prescribed by regulators is validated before being legislated.

Suggested Citation

  • Hazel Bateman & Isabella Dobrescu & Ben R. Newell & Andreas Ortmann & Susan Thorp, 2013. "As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures," Research Paper Series 326, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:326
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp326.pdf
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    References listed on IDEAS

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    Cited by:

    1. Michael P. Keane & Susan Thorp, 2016. "Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing," Economics Papers 2016-W10, Economics Group, Nuffield College, University of Oxford.
    2. repec:eee:hapoch:v1_661 is not listed on IDEAS
    3. repec:bla:ausecr:v:49:y:2016:i:4:p:483-493 is not listed on IDEAS

    More about this item

    Keywords

    consumer finance; diversification heuristics; pensions; choice experiment;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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