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Risk Presentation and Portfolio Choice

Author

Listed:
  • Hazel Bateman
  • Christine Eckert
  • John Geweke
  • Jordan Louviere
  • Stephen Satchell
  • Susan Thorp

Abstract

Efficient investment of personal savings depends on clear risk disclosures. We study the propensity of individuals to violate some implications of expected utility under alternative "mass-market" descriptions of investment risk, using a discrete choice experiment. We found violations in around 25% of choices, and substantial variation in rates of violation, depending on the mode of risk disclosure and participants’ characteristics. When risk is described as the frequency of returns below or above a threshold we observe more violations than for range and probability-based descriptions. Innumerate individuals are more likely to violate expected utility than those with high numeracy. Apart from the very elderly, older individuals are less likely to violate the restrictions. The results highlight the challenges of disclosure regulation.

Suggested Citation

  • Hazel Bateman & Christine Eckert & John Geweke & Jordan Louviere & Stephen Satchell & Susan Thorp, 2016. "Risk Presentation and Portfolio Choice," Review of Finance, European Finance Association, vol. 20(1), pages 201-229.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:1:p:201-229.
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