Do Risk Disclosures Affect Investment Choice?

The aim of this study was to understand the potential effects of different information disclosures regarding risk on retirement investing behavior. The authors developed and tested two modifications to the section on investment performance on the prototype DOL Model Comparative Chart, providing additional risk and return information in a clear graphical manner. One modification provided summary risk ratings, while the other provided a visual representation of actual returns series over 10 years. They conducted an experiment using a nationally representative internet survey. All participants were asked to perform the same hypothetical task allocating retirement investments over a range of six possible typical investment fund options. Treatment groups were randomly allocated to receive different representations of the same risk/return information. They also investigated order effects by randomizing the presentation order of the six investment options. Alternative representations of the risk/return information had a statistically significant effect on allocation decisions, but the practical significance is difficult to determine: although different treatment groups chose different allocations across the six investment options, the risk/return characteristics of the resulting portfolios were very similar. Perhaps surprisingly, the effects of the alternative disclosure forms do not seem to vary across individuals with different levels of financial literacy, or across individuals with different levels of risk aversion. Order effects were stronger than the disclosure form effects, but were independent of the risk characteristics of the investment options: the first and last investment options presented tend to receive larger allocations. Furthermore, the order effects do not appear to be offset by providing additional risk/return information. Their results are consistent with findings that summary disclosure forms are popular with consumers and help them feel more confident about their decisions; our results go further in showing that alternative forms do lead to different choices, but that those different choices may not result in practically significant differences in investment outcomes.