We demonstrate that investor satisfaction and investment behavior are influenced substantially by the price path by which the final investor return is achieved. In a series of experiments, we analyze various different price paths. Investors are most satisfied if their assets first fall in value and then recover, and they are least satisfied with the opposite pattern, independent of whether the final return is positive or negative. Price paths systematically influence risk preferences, return beliefs, and ultimately trading decisions. Our results enable a much more holistic perspective on a wide range of topics in finance, such as the disposition effect, risk-taking behavior after previous gains and losses, and behavioral asset pricing.Keywords: investor satisfaction, reference points, risk tolerance, investor behavior, experimental finance JEL classification: D14, D81, G11 * The authors thank Charlotte Borsboom, Thorsten Hens, Jürgen Huber, Danling Jiang, Michael Kirchler, Thomas Langer, Amos Nadler, Alexandra Niessen-Ruenzi, Michaela Pagel, Hersh Shefrin, Martin Weber as well as participants of the following university research seminars and conferences for helpful comments and suggestions:

Prospect Theory is widely regarded as the most promising descriptive model for decision making under uncertainty. Various tests have corroborated the validity of the characteristic fourfold pattern of risk attitudes implied by the combination of probability weighting and value transformation. But is it also safe to assume stable Prospect Theory preferences at the individual level? This is not only an empirical but also a conceptual question. Measuring the stability of preferences in a multi-parameter decision model such as Prospect Theory is far more complex than evaluating single-parameter models such as Expected Utility Theory under the assumption of constant relative risk aversion. There exist considerable interdependencies among parameters such that allegedly diverging parameter combinations could in fact produce very similar preference structures. In this paper, we provide a theoretic framework for measuring the (temporal) stability of Prospect Theory parameters. To illustrate our methodology, we further apply our approach to 86 subjects for whom we elicit Prospect Theory parameters twice, with a time lag of one month. While documenting remarkable stability of parameter estimates at the aggregate level, we find that a third of the subjects show significant instability across sessions.

We apply a new and innovative approach to communicating risks associated with financial products that should support investors in making better investment decisions. In our experiments, participants are able to gain "simulated experience" by random sampling of a previously described return distribution. We find that simulated experience considerably improves participants' understanding of the underlying risk-return profile and prompts them to reconsider their investment decisions and to choose riskier financial products without regretting their higher risk-taking behavior afterwards. This method of experienced-based learning has high potential for being integrated into real-world applications and services. AbstractWe apply a new and innovative approach to communicating risks associated with financial products that should support investors in making better investment decisions. In our experiments, participants are able to gain "simulated experience" by random sampling of a previously described return distribution. We find that simulated experience considerably improves participants' understanding of the underlying risk-return profile and prompts them to reconsider their investment decisions and to choose riskier financial products without regretting their higher risk-taking behavior afterwards. This method of experienced-based learning has high potential for being integrated into real-world applications and services.JEL classification: D81; G11

Risk is an integral part of many economic decisions, and is vitally important in finance. Despite extensive research on decision-making under risk, little is known about how risks are actually perceived by financial professionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 finance professionals and 4,559 lay people in nine countries representing ∼50% of the world's population and more than 60% of the world's gross domestic product, we expose participants to return distributions with equal expected return and we systematically vary the distributions' next three higher moments. Of these, skewness is the only moment that systematically affects financial professionals' perception of financial risk. Strikingly, variance does not influence risk perception, even though return volatility is the most common risk measure in finance in both academia and the industry. When testing other, compound risk measures, the probability to experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals' propensity to invest, skewness and loss probability have strong predictive power too. However, volatility and kurtosis also have some additional effect on participants' willingness to invest. Our results are very similar for lay people, and they are robust across and within countries with different cultural backgrounds as well as for different job fields of professionals.

No abstract

No abstract

We assess how investors’ willingness-to-pay (WTP) for sustainable investments responds to the social impact of those investments, using a framed field experiment. While investors have a substantial WTP for sustainable investments, they do not pay significantly more for more impact. This also holds for dedicated impact investors. When investors compare several sustainable investments, their WTP responds to relative, but not to absolute, levels of impact. Regardless of investments' impact, investors experience positive emotions when choosing sustainable investments. Our findings suggest that the WTP for sustainable investments is primarily driven by an emotional, rather than a calculative, valuation of impact.

No abstract