The influence of portfolio characteristics and investment period on investment choice

Two experimental tests of the ability of potential investors to project return and risk information to a planning horizon found them to be decidedly more risk averse in creating portfolios on the basis of 1-year data than on the basis of data at a 10-year planning horizon. Three experimental tests of their ability to infer portfolio return and risk characteristics on the basis of the return and risk characteristics of the component investments found them to be insensitive to distributional characteristics in creating portfolios on the basis of both 1-year and 10-year data. Results are interpreted in terms of representativeness and anchoring-and-adjustment heuristics and a mental accounts decision rule. In addition, subjects preferred to obtain distributional information in the form of quantiles rather than moments and moments rather than probability density plots. We conclude that investors should be presented with a choice among the distributions of portfolios at the planning horizon and that these distributions should be characterized in simple, understandable terms.