Novice Investing

Details
Title
Novice Investing
Usage & Reproduction Rights
http://rightsstatements.org/vocab/InC/1.0/
Type
Video recording
URI / Handle
http://hdl.handle.net/1961/muislandora:2978
Created
2015-01-01T00:00:00Z
Abstract
Factors that influence the ability of novice investors making the right investment decisions based on their risk attitude. To improve society’s retirement outcome, it is important to study how the design of retirement plans, especially investment options available to participants, impact a participant’s investing decision. This study utilizes the notable financial risk self-assessment instrument created by Grable and Lytton. Professors from different schools, that teach different academic standing students were asked to pass out surveys in their classes. The surveys were broken up into 3 parts: 1, Demographics, 2, risk attitude assessment, and 3, survey type, either with 5 or 20 investment options. Then the data was analyzed to see if there were any major patterns in picking the right investment option based on the self assessed risk attitude. Findings: The main question in this study was: does the number of investment choices affect the ability of novice investors to make the right decision given their risk attitude. It was hypothesized that there would be a clear difference between the results from Survey A and the results from Survey B; where participants who would have taken Survey A were expected to have a higher accuracy rate when choosing an investment option that best fit their risk tolerance, based on their self-assessment of risk, than those who would have taken Survey B. After analyzing all the data, it is fair to conclude that this survey's data did not support the hypothesis. In fact, the data shows that both surveys on average had a percent correctness of 22%. This study also investigates how student characteristics impact the likelihood of a survey respondent choosing the correct investment option, i.e., the investment option that best matches his or her risk attitude. The survey data shows that as the student's sophistication increases, so does the likelihood of choosing the correct investment option. The upperclassman students, honors students, and students with previous investing experience outperformed underclassman students, non-honors students, and those students with no previous investing experience. Those with higher sophistication are more likely to be able to pick out the correct investment choice that matches their risk attitude. Interestingly enough students with a higher sophistication, such as honor students, upperclassman, and students with previous investing experience, had a lower spread than underclassman, non-honors, and students with no previous investing experience. Therefore one can conclude that sophistication plays a major role in likelihood of selecting the correct investment option. The findings on my study suggest that people are likely to pick a better investment option that matches their risk attitude when given fewer choices, contradicting current belief. This study also found that sophistication plays a big role in successfully investing, and as an educational institution we should focus more on teaching novice investors the necessary skills to successfully plan for their retirement.

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