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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | How Risk Simulations Improve Long-Term Investment Decisions |
| Organization Unit | |
| Authors |
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| Language |
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| Institution | University of Zurich |
| Series Name | SSRN |
| Number | 2603780 |
| Number of Pages | 38 |
| Date | 2016 |
| Abstract Text | We propose and test a novel way of communicating investment risks in which investors are presented with a simulation of prospective wealth paths over time when making their investment decision. We test the benefits of our new approach and alternative ways of risk communication, like graphical illustrations or simulating final wealth outcomes, in a long-term experiment in which investors experience intermediate investment success and can adjust their investment strategy along the way, rather than making one-off investment decisions. Our results show that simulating possible wealth paths serves as a substitution for actual investment experience, possibly reducing the costs of investment mistakes. It also improves investors’ understanding of risk compared to other means of risk communication. We conclude that risk simulations are a useful way to improve investors’ decision making abilities. |
| Official URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603780 |
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