Working Paper: CEPR ID: DP13737
Authors: Martin Weber; Christine Laudenbach; Michael Ungeheuer
Abstract: We experimentally study how presentation formats for return distributions affect investors' diversification choices. We find that sampling returns alleviates correlationneglect and constitutes an effective way to improve financial decisions. When participants get a description of probabilities for outcomes of the joint return distribution, we confirm the common finding that investors neglect the correlation between assets in their diversification choices. However, when participants sample from the joint distribution, they incorporate correlation into choices as predicted by normative theory. Results are robust across three experiments with varying expertise and experience of participants (students vs. investors), and varying return distributions (discrete, continuous).
Keywords: investment decisions; diversification; correlation neglect; risk taking; fintech
JEL Codes: C91; G02; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presentation formats (Y90) | diversification choices (G11) |
| descriptive presentation (Y20) | correlation neglect (C10) |
| sampling returns (C83) | alleviate correlation neglect (C10) |
| sampling returns (C83) | increased diversification (G39) |
| graphical experience sampling (C90) | diversification choices (G11) |
| numerical experience sampling (C91) | weaker diversification response (L25) |