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Presenting Investment Results Asset by Asset Lowers Risk Taking

Authors:
Publication Date:
Jan 2009
Project Programs:
Behavioral Economics

We examine how the presentation of investment results affects risk taking using an experiment in which subjects are presented with their investment results either asset by asset or aggregated into one portfolio result. We estimate that presenting investment results segregated by asset lowers risk taking by 23%. Surprisingly, this effect is even larger among subjects with investing experience, providing support for the relevance of this result in the field. Subjects who view their investment results asset by asset invest more in the risk-free asset and thus hold portfolios with lower expected return. We calibrate a model that allows investors to be sensitive to potential losses at the individual-asset level or only at the portfolio level. Our calibration results indicate that subjects who observe their investment results asset by asset are sensitive to potential losses at the individual-asset level. In contrast, subjects who observe their investment results aggregated show no sensitivity to losses at the individual-asset level. We conclude that presenting segregated investment results lowers risk taking by making loss averse investors sensitive to the results of individual assets in their portfolio. This combination of loss aversion and narrow framing in the cross section is distinct from myopic loss aversion.

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