Attention to Risk and Return: Choice Experiment of the Stated and Inferred Use of Investment Attributes

Abstract

This paper applies a choice experiment method to analyze investors’ attention to investment attributes. Prior research mainly in environmental, agricultural, and transport economics has observed that people actually use different attributes than which they say in choice experiment tasks. This research examines do people pay attention to all the given investment attributes, and if they do not, whether the self-reported attribute attendance corresponds to the behavior inferred from the choices. The experiment is conducted among a pool of 845 financially literate subjects, which enables a study of the factors affecting the investment decisions of informed individuals. The choice experiment puts the subjects in a decision making situation in which they are presented with hypothetical investment opportonities in the agricultural and food production sector. The investments are described with four attributes: voting right, return right, capital appreciation, and expect return. We use the equality-constrained latent class (ECLC) method to infer the choice patterns.The comparison of the stated attribute attendance patterns to the inferred attribute non-attendance patterns shows that the investors are prone to overstate the importance of expected return in their choices. The result indicates that individuals may not be fully aware of the factors affecting their investment decisions. Finding such behavioral bias among financial professionals implies that financially less knowledgeable people may be even more prone to uninformed investment decisions, be for example lured by the marketing of financial products with high returns.