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

Published online by Cambridge University Press:  14 March 2025

Christian Ehm ,
Christine Laudenbach  and
Martin Weber
Christian Ehm
Affiliation:
University of Mannheim, Mannheim, Germany
Christine Laudenbach*
Affiliation:
Goethe University Frankfurt, Frankfurt, Germany
Martin Weber
Affiliation:
University of Mannheim and CEPR London, Mannheim, Germany
*
laudenbach@finance.uni-frankfurt.de
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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.

Keywords

Risk takingVolatility inadaptabilityAsset allocationExperience samplingRisk perception

JEL classification

G11: Portfolio Choice • Investment Decisions
Type
Original Paper
Information
Experimental Economics , Volume 21 , Issue 2 , June 2018 , pp. 457 - 480
Copyright
Copyright © 2017 Economic Science Association

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