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Nudging against panic selling: Making use of the IKEA effect

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  • Ashtiani, Amin Zokaei
  • Rieger, Marc Oliver
  • Stutz, David

Abstract

A typical behavioral pattern of investors is to reduce stock market exposure after a crash. This leads to a typical “buy high, sell low” strategy that is detrimental to long-run wealth accumulation. We suggest a simple nudge based on the IKEA effect and the endowment effect that reduces this problem substantially: actively involving investors in the selection process of the risky investments, while restricting their selections in a way that preserves a large degree of diversification. The “self-assembled” portfolio is, indeed, less likely to be sold off: in an experiment with N=219 university students, we show that this nudge reduces panic selling significantly. In fact, it makes a difference that is at least as big as the difference between experienced and inexperienced investors.

Suggested Citation

  • Ashtiani, Amin Zokaei & Rieger, Marc Oliver & Stutz, David, 2021. "Nudging against panic selling: Making use of the IKEA effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    • Handle: RePEc:eee:beexfi:v:30:y:2021:i:c:s2214635021000460
    DOI: 10.1016/j.jbef.2021.100502
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    Cited by:

    1. Brunner, Fabian & Gamm, Fabian & Mill, Wladislaw, 2023. "MyPortfolio: The IKEA effect in financial investment decisions," Journal of Banking & Finance, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    IKEA effect; Endowment effect; Familiarity bias; Household finance; Strategic asset allocation; Behavioral biases; Nudging;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G5 - Financial Economics - - Household Finance

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