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Lejarraga, T., Woike, J. K., & Hertwig, R. (2019). Experiences and descriptions of financial uncertainty: Are they equivalent?. In R. Hertwig, T. Pleskac, T. Pachur, & the Center for Adaptive Rationality (Eds.), Taming uncertainty (pp. xx–xx). Boston, MA: MIT Press. doi:XXXXXXX

Chapter 10 Risk tool

Introduction

In the following, you will make several investment decisions by allocating 100 hypothetical euros across a safe and a risky asset for a 5-year investment period. How you distribute these 100 hypothetical euros is entirely up to you.

Initially you will not know what the properties of these two assets are. To learn about the consequences of your allocation, you can use a simulation tool. The simulation tool generates individual 5-year outcomes for a given allocation and records the outcomes as a histogram. First, you will be required to draw 8 individual outcomes using the Simulate ONE button. Afterwards you may use the Simulate SLOW and Simulate FAST buttons to generate outcomes in an automatic and / or fast manner.

Try a few different allocations using the slider. Slider settings further to the right mean higher investments into the risky asset and smaller investments into the safe asset and vice versa. When you are happy with a given allocation, proceed by clicking on Final Decision.

After you have made you decision you will be prompted to answer a few questions on your investment.

 

 

Expected value: 0,00 Euro

Safe option   50
50   Risky option
 
 

Introduction

In the following, you will make several investment decisions by allocating 100 hypothetical euros across a safe and a risky asset for a 5-year investment period. How you distribute these 100 hypothetical euros is entirely up to you.

Initially you will not know what the properties of these two assets are. To learn about the consequences of your allocation, you can use a simulation tool. The simulation tool generates individual 5-year outcomes for a given allocation and records the outcomes as a histogram. First, you will be required to draw 8 individual outcomes using the Simulate ONE button. Afterwards you may use the Simulate SLOW and Simulate FAST buttons to generate outcomes in an automatic and / or fast manner.

Try a few different allocations using the slider. Slider settings further to the right mean higher investments into the risky asset and smaller investments into the safe asset and vice versa. When you are happy with a given allocation, proceed by clicking on Final Decision.

After you have made you decision you will be prompted to answer a few questions on your investment.

How risky do you perceive Fund B (the risky Fund) to be?
(1 = not risky at all, 7 = very risky)

How confident do you feel about investing in the risky fund?
(1 = completely unconfident, 7 = completely confident)

If we put 100 Euro in the riskier fund, what is the expected return of the 100 Euro after five years? (Give your best estimate.)

Euro

If we put 100 Euro in the riskier fund, in how many out of 100 cases will the return fall below 100 Euro after five years?

In out of 100 cases.

If we put 100 Euro in the riskier fund, in how many out of 100 cases will the return fall be above 150 Euro after five years?

In out of 100 cases.

How informed do you feel about the funds?
(1 = completely uninformed, 7 = completely informed)

 

Your five-year return was

Euro

 
 

How satisfied are you with your return?
(1 = completely unsatisfied, 7 = completely satisfied)



Results

In the graphs below, the red lines indicate your responses against those of other users of the tool. Each column of graphs indicates a tool, and each row indicates a response. You can also examine which tools help people take more risk, feel more confident or informed.

The result plot is being generated. Once finished it will appear as image below. Please wait...

Click here to try an other of the four available paradigms: Description, Experience, Distribution, Risktool.

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In this interactive element we have shown you the Risk Tool and its components as addressed in chapter 10 and originally proposed by Kaufmann, Weber, & Haisley (2013). Each component increases the degree of experience that you get. In the description component, you only saw your allocation and its likely outcomes in text. In the experience component, you were able to sample from any proposed allocation. In the distribution component, you were able to see the whole possible distribution of outcomes of your proposed allocation. And finally, in the Risk Tool (current element), you were able to simulate, either slowly or quickly, how the distribution of outcomes realizes. Which one did you prefer? Which component was most helpful to make an investment decision?

Research shows that the Risk Tool helps people understand risks better, and leads them to be more comfortable choosing higher risk.

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Click on any reward badge in the footer to review take home messages of this or other elements.