We study the effect of information aggregation on individual investors’ risk-taking behavior in two experiments, each having three different treatments. Subjects in the control group were given hypothetical returns for both the risk-free and the risky asset. Subjects in the account group were also given information about returns separately for each of the two assets. However, this information was scaled according to a subject's chosen investment amount. Subjects in the portfolio group could observe returns on a portfolio level, which constitutes the highest level of information aggregation in our study. Results show that a higher degree of information aggregation results in greater risk-taking. Increased risk-taking is associated with a lower risk perception and a more accurate estimation of the probability of a loss. Furthermore, reporting aggregated returns might lead investors to evaluate the aggregated outcome relative to a different reference point (the overall portfolio instead of the amount invested in risky assets), which makes them less likely to experience a loss and therefore increases the willingness to invest in the risky asset. Thus, aggregating information seems to reduce mental accounting, namely having one account for risky and one account for risk-free investments. Ex post, our findings show that the portfolio group also makes consistent subsequent allocation decisions and shows a lower dissatisfaction with outcomes in the loss domain. The results were consistent across both experiments despite the use of different subject pools and investment amounts.
Journal of Economic Behavior & Organization, 95, 2013