Fast and frugal heuristics in high-stakes investment decisions: New descriptive models of bank customers' behavior

Abstract

This paper aim to uncover the decision processes used by average investors, including their investment goals, the information sets they consider, and the number of factors that actually influence high-stakes financial decisions. We present new experimental and survey data collected from bank customers at several Italian banks. Most subjects use a strict subset of the information available to them, ignoring variables that standard economic models typically assume drive investors' behavior. Fast and information-frugal heuristics appear to explain the information search and decision behavior of many subjects observed in this study, reflecting a lexicographic hierarchy of risk, time horizon and cost, in that order. A simple combination of a fast and frugal tree and a tallying rule predicts more than 80% of investors' decisions.