Communicating asset risk: How name recognition and the format of historic volatility information affect risk perception and investment decisions

Elke U. Weber, Niklas Siebenmorgen, Martin Weber

Research output: Contribution to journalArticle

97 Scopus citations

Abstract

An experiment examined how the type and presentation format of information about investment options affected investors' expectations about asset risk, returns, and volatility and how these expectations related to asset choice. Respondents were provided with the names of 16 domestic and foreign investment options, with 10-year historical return information for these options, or with both. Historical returns were presented either as a bar graph of returns per year or as a continuous density distribution. Provision of asset names allowed for the investigation of the mechanisms underlying the home bias in investment choice and other asset familiarity effects. Respondents provided their expectations of future returns, volatility, and expected risk, and indicated the options they would choose to invest in. Expected returns closely resembled historical expected values. Risk and volatility perceptions both varied significantly as a function of the type and format of information, but in different ways. Expected returns and perceived risk, not predicted volatility, predicted portfolio decisions.

Original languageEnglish (US)
Pages (from-to)597-609
Number of pages13
JournalRisk Analysis
Volume25
Issue number3
DOIs
StatePublished - Jun 1 2005
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Safety, Risk, Reliability and Quality
  • Physiology (medical)

Keywords

  • Behavioral finance
  • Home bias
  • Portfolio decisions
  • Risk perception
  • Volatility forecasts

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