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Review of Behavioral Finance

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This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions. We evaluate 221 undergraduate students in the U.S. and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Allowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio. Here, we find that participants who receive interactive learning modules—which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model—increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.


Originally published by Emerald Publishing under a Creative Commons 4.0 in Review of Behavioral Finance, 2020, Volume 13, Issue 4. DOI: 10.1108/rbf-03-2019-0045.