The Role of Experience Sampling and Graphical Displays on One's Investment Risk Appetite

We examine how different types of risk presentation numerical descriptions, experience sampling, graphical displays, and a combination of these formats in a ‘risk tool simulation’influence asset allocations in an experimental investment portfolio. Participants viewed information about a risky and a risk free fund and made a portfolio allocation. Risky allocations were elevated in the risk tool simulation and experience sampling conditions. We find no evidence of greater dissatisfaction with returns in these conditions and observe a willingness to take on similar levels of risk in subsequent allocations. Greater risky allocation in the combination and experience sampling conditions is mediated by decreased risk perception, increased confidence in the risky fund, and a lower estimation of the probability of a loss. Despite these indicators of optimism about the risky fund, participants in the risk tool simulation condition underestimate the probability of a high gain and are more accurate on comprehension questions about the estimated return and the probability of a loss.