Circle of incompetence: Sense of understanding as an improper guide to investment risk

Andrew R. Long*, Philip M. Fernbach, Bart De Langhe

*Autor corresponent d’aquest treball

    Producció científica: Article en revista indexadaArticleAvaluat per experts

    15 Cites (Scopus)

    Resum

    Consumers incorrectly rely on their sense of understanding of what a company does to evaluate investment risk. In three correlational studies, greater sense of understanding was associated with lower risk ratings (Study 1) and with prediction distributions of future stock performance that had lower standard deviations and higher means (Studies 2 and 3). In all studies, sense of understanding was unassociated with objective risk measures. Risk perceptions increased when the authors degraded sense of understanding by presenting company information in an unstructured versus structured format (Study 4). Sense of understanding also influenced downstream investment decisions. In a portfolio construction task, both novices and seasoned investors allocated more money to hard-to-understand companies for a risk-tolerant client relative to a risk-averse one (Study 5). Study 3 ruled out an alternative explanation based on familiarity. The results may explain both the enduring popularity and common misinterpretation of the “invest in what you know” philosophy.

    Idioma originalAnglès
    Pàgines (de-a)474-488
    Nombre de pàgines15
    RevistaJournal of Marketing Research
    Volum55
    Número4
    DOIs
    Estat de la publicacióPublicada - d’ag. 2018

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