Alexander Klos

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 Samuelsons (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 coefficient of variation. Implications for future research and practical implications for financial advisors are discussed.

Impact of Presentation Format and Self-Reported Risk Aversion on Revealed Skewness Preferences

This paper reports the results of an experiment on the revealed preference for skewness in a comparison of continuous return distributions. We find that revealed preferences are highly sensitive to the way asset risks are communicated. Whereas probability density functions lead to a pronounced preference for left-skewed distributions, the opposite is true for cumulative distribution functions. Systematic misperceptions of the variance cannot explain the sensitivity of preferences to the presentation format. Part of the preference for positive skewness when risks are communicated through probability density functions is due to a systematic misestimation of the expected return. We also find that self-reported risk aversion, a measure of risk attitude commonly used in practice, is a valuable predictor of skewness preferences. Individuals that judge themselves as more risk averse show a stronger preference for right skewness.

Portfolio Choice in the Presence of Non-Tradable Income: An Experimental Analysis

Abstract This paper reports the results of an experiment on portfolio choice in the presence of non-tradable income. The non-tradable income part could either be riskless or risky (background risk). In many cases, we observe behavior that is qualitatively consistent with the predictions of normative theory. However, correlations between financial and non-tradable wealth are neglected. The computation of aggregated risk profiles helps subjects to partly overcome the deviations from normative theory due to neglect of correlations.

Causal Evidence on Regular Internet Use and Stock Market Participation

Stock market participation rates have been quite stable or even dropped over the last years although more households regularly use the Internet. This observation contradicts earlier scientific evidence that the advent of the Internet increased stock market participation rates. Based on representative data from household panel surveys and with the help of two instruments for Internet usage we show that the Internet indeed has a positive and causal effect on stock market participation. Additionally, we present a solution of the puzzling observation above by showing that the positive effect of Internet usage on stock market participation is driven by households with a high degree of financial literacy and new Internet adopters were financially illiterate on average in recent years.