BEworks examined how people are influenced by the way in which various portfolio risk levels are described to them. Study participants were asked to look at some hypothetical $10,000 portfolios and pick the one that they felt most comfortable with. BEworks described the portfolio performance in three different ways – as total market value, gains or losses in dollar terms and percentage returns.
Groups of participants were shown different pairings of these descriptions – for example, some saw market value compared against dollar gains and losses, and others saw market value and percentage returns. Rationally speaking, this shouldn’t have mattered.
A $10,000 portfolio with the potential to gain $1,200 and lose $400 over a year is the same as one that might gain 12 per cent and lose 4 per cent and the same again as one that might grow to $11,200 or decline to $9,600. And yet, being shown gains and losses in dollar terms and percentage returns seemed to put investors in a more conservative mood than overall portfolio market value.
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