The Impact of Feedback Frequency on Risk Taking: How general is the Phenomenon?

In a recent QJE-article, Gneezy and Potters (1997) present experimental evidence for the impact of feedback frequency on individual risk taking behavior in repeated investment decisions. They find an increased willingness to invest into a risky asset if less frequent feedback about the outcome of previous investments is provided. The observed decision pattern is explained by myopic loss aversion, a combination of mental accounting and loss aversion. In this note, we argue that the findings of Gneezy and Potters on the relationship between feedback frequency and risk taking are not as general as they might seem. We provide theoretical arguments and experimental evidence to demonstrate that the reported phenomenon is not robust to changes in the risk profiles of the given investment options.

The impact of feedback frequency on risk taking : how general ist the phenomenon?

In a recent QJE-article, Gneezy and Potters (1997) present experimental evidence for the impact of feedback frequency on individual risk taking behavior in repeated investment decisions. They find an increased willingness to invest into a risky asset if less frequent feedback about the outcome of previous investments is provided. The observed decision pattern is explained by myopic loss aversion, a combination of mental accounting and loss aversion. In this note, we argue that the findings of Gneezy and Potters on the relationship between feedback frequency and risk taking are not as general as they might seem. We provide theoretical arguments and experimental evidence to demonstrate that the reported phenomenon is not robust to changes in the risk profiles of the given investment options

Framing Effects and Information Processing of Individual Investors

The framing of financial products can strongly influence information processing and thus risk-taking behavior of individual investors. For example, investment portfolios can be presented in aggregated or segregated framing, meaning that they can display either the overall distribution or the single investments of the investment portfolio itself. Two experimental studies demonstrate that correlation and variance of investment portfolios as well as the type of information processing have great influence on the preferred framing. If the variance of the portfolio is extremely high, the aggregated presentation mode is no longer significantly preferred. Framing effects are also mainly observed for individuals who decide intuitively rather than analytically

Myopic loss aversion : Do evaluation periods and presentation modes matter?

Master'sMASTER OF SOCIAL SCIENCE

Does Aggregated Returns Disclosure Increase Portfolio Risk-Taking?

Many previous experiments have found that, consistent with myopic loss aversion, subjects invest more in risky assets if they are given less frequent feedback about their returns, are shown their aggregated portfolio-level (rather than separate asset-by-asset) returns, or are shown long-horizon (rather than one-year) historical asset class return distributions. We study the implications of these results for the effect of financial institutions’ returns disclosure policy on risk-taking. We find that aggregated returns disclosure treatments do not increase portfolio allocations to equity in an experiment where—in contrast to previous experiments—subjects invest in real mutual funds over the course of one year.

An Investor Behavior and Related Asset Pricing Distortions

I document a stylized fact about stock buying behavior of investors. I empirically show that investors tend to buy riskier stocks following a realized loss. The risk measure that the investors seem to pay attention to is the market beta of the stocks. Thus, after a realized loss, investors buy higher beta stocks. This behavior is observed in institutional as well as individual investors but is more pronounced among individual investors with lower expertise, who on an average buy a new stock with up to 15 % higher beta than that of the old stock they were holding. For an agent with utility consistent with prospect theory, this behavior emerges as the optimal response to her problem of maximizing utility within a mental account. Furthermore, this behavior can aggregate up during market downturns and cause pricing distortions in a direction similar to the beta anomaly. With this insight, I suggest a modification to the betting against beta trading strategy that can improve the Sharpe ratio more than twofold.PHDBusiness AdministrationUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttps://deepblue.lib.umich.edu/bitstream/2027.42/146069/1/koustavd_1.pd

Does binding or feedback influence myopic loss aversion : an experimental analysis

Empirical research has shown that a lower feedback frequency combined with a longer bind-ing period decreases myopia and thereby increases the willingness to invest into a risky asset. In an experimental study, we disentangle the intertwined manipulation of feedback frequency and binding period to analyze how both variables alone contribute to the change in myopia and how they interact. We find a strong effect for the length of commitment, a much less pro-nounced effect for the feedback frequency, and a strong interaction between both variables. The results have important implications for real world intertemporal decision making

Investment decisions and time horizon: Risk perception and risk behavior in repeated gambles

To investigate the effect of time horizon on investment behavior, this paper reports the results of an experiment in which business graduate students provided certainty equivalents and judged various dimensions of the outcome distribution of simple gambles that were played either once or repeatedly for 5 or 50 times. Systematic mistakes in the ex-ante estimations of the distributions of outcomes after (independent) repeated plays were observed. Despite correctly realizing that outcome standard deviation increases with the number of plays, respondents showed evidence of Samuelson's (1963) fallacy of large numbers. Perceived risk judgments showed only low correlations with standard deviation estimates, but were instead related to the anticipated probability of a loss (which was overestimated), mean excess loss, and the coe±cient of variation. Implications for future research and practical implications for financial advisors are discussed

Modeling Cross Category Purchase Decision Making with Consumers’ Mental Budgeting Control Habit

Cross-category decision making is an ongoing research in decision science. Cross-category modeling is a powerful tool for big data and business analytics. Cross-category decision making involves evaluating multiple categories for complementary/substitutional utilities. This paper examines consumers’ mental budgeting control habit for its impact on cross purchase decisions. This factor has not been examined in existing cross modeling literature. This paper fits a base cross category model and a budgeting control habit cross model using a consumer grocery shopping dataset. The results show that by incorporating this variable in the cross model, model fit score and prediction accuracy are significantly improved. The budgeting control habit factor has significant moderating effects on price effects and cross price effects. In addition to providing the modeling technique, this paper also finds that consumers classify basket items into root and add-on categories. The common sense that price drop boosts sales is only true for the root category items. Price drop of add-on items may trigger consumers reconfiguring their basket items but not necessarily increase sales of the add-on items themselves