Being an Expert When There Are no Experts: The Impact of Knowledge Illusion on Probability Weighting

Baars, Maren; Goedde-Menke, Michael

doi:10.2139/ssrn.3383607

Cited by 3 publications

(4 citation statements)

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“…Second, knowledge illusion might be an additional explanation. Baars and Goedde-Menke (2019) find that individuals tend to distinguish between different sources of risk based on their perceived expertise. Because perceived expertise does not necessarily coincide with the actual expertise of an individual, making decisions under risk can involve what the authors refer to as “knowledge illusion”.…”

Section: Resultsmentioning

confidence: 95%

“…, 2018). Hence, knowledge illusion may be an explanation why households refrain from XTFs since XTFs imply, as opposed to geographical proximity, investing internationally for which households perceive, in reference to Baars and Goedde-Menke (2019), less expertise and fewer incentives.…”

Section: Resultsmentioning

confidence: 99%

“…In this way, knowledge illusion increases the attraction of investments which are geographically close to the individual and can be associated with less diversified portfolios (see also Dimmock et al, 2018). Hence, knowledge illusion may be an explanation why households refrain from XTFs since XTFs imply, as opposed to geographical proximity, investing internationally for which households perceive, in reference to Baars and Goedde-Menke (2019), less expertise and fewer incentives.…”

Section: Return Differences (Rds)mentioning

confidence: 99%

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Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base

Wanger

Oehler

2022

RBF

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PurposeThe purpose of this paper is to investigate whether downside-risk measures help to explain why households largely refrain from investing in Exchange Traded Funds that replicate broad and internationally diversified market indices, so-called XTFs, although studies frequently recommend to do so.Design/methodology/approachThe paper analyzes whether evaluating risk in terms of downside-risk measures which reflect households' interpretation of risk closer than the standard deviation (SD) of returns, yields less risk-return-enhancements, and thus, fewer incentives for households to invest in XTFs. Household portfolios are compiled by combining stylized portfolio compositions that involve multiple asset classes and German households' security holdings. The data set covers the period from January 2014 to December 2016 and includes 47,388 securities.FindingsThe results indicate that none of the downside-risk measures can help to explain the reluctance of households to invest in XTFs. On the flip side, the results show that all stylized household portfolios can enhance the risk-return position from employing XTFs, regardless of the underlying risk measure. This supports the advice to invest in XTFs and extends it upon households that evaluate risk in terms of downside-risk.Originality/valueTo the best of the authors' knowledge, this study is the first to investigate risk-return-enhancements from XTFs while simultaneously considering various downside-risk measures and multiple asset classes of household portfolios.

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Section: Resultsmentioning

confidence: 95%

Section: Resultsmentioning

confidence: 99%

Section: Return Differences (Rds)mentioning

confidence: 99%

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Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base

Wanger

Oehler

2022

RBF

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“…Another influencing factor regarding households' reluctance to employ XTFs can be associated with the concept of knowledge illusion by Baars/Goedde-Menke (2019). This concept involves that individuals tend to distinguish between different sources of risk based on their perceived expertise.…”

Section: Rq 2: Do Downside-risk Measures Help To Explain the Reluctance Of Households To Invest In Xtfs?mentioning

confidence: 99%

The influence of XTFs on risk and return of households’ investment portfolios

Wanger¹

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In this doctoral thesis, XTFs are considered as plain-vanilla Exchange Traded Funds which pursue a passive investment approach and replicate a broad, internationally diversified market index. The thesis pursues two research goals. First, to investigate whether XTFs enhance risk and return of household portfolios when taking multiple relevant asset classes into account – not only stocks. Second, to examine whether employing XTFs in household portfolios is reasonable when including practical constraints and risk measures that reflect households’ actual investment situation and interpretation of risk more closely compared to previous literature. To meet these research goals, three empirical analyses are conducted. The analyses are built on the foundations of neoclassical finance theory, new institutional economics, market microstructure theory, financial intermediation, as well as behavioral finance and economics. For the empirical investigations, two data sets of the German central bank (Deutsche Bundesbank) are combined: The Panel on Household Finances-survey and the Securities Holdings Statistics-base. The thesis ends by discussing the empirical analyses' results, possible limitations to the findings' generalizability, and implications for different stakeholders.

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Retail Investor Behavior, Cryptocurrencies, and Financial Market Innovation – Insights from the 5th European Retail Investment Conference (ERIC)

Burghof¹,

Fecker²,

Jaquart³

et al. 2020

CCM

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The 5th European Retail Investment Conference was hosted at Börse Stuttgart, Germany, from April 10th to 12th 2019. The conference chairs invited academics and practitioners to participate and discuss empirical and theoretical research focusing on retail investor products and services, the impact of technology on retail investors, investors’ decision-making, investor protection schemes, and market microstructure. Albert Menkveld, Professor of Finance at Vrije Universiteit Amsterdam and Fellow at the Tinbergen Institute, held the keynote about the fundamental value of bitcoin.

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Being an Expert When There Are no Experts: The Impact of Knowledge Illusion on Probability Weighting

Cited by 3 publications

References 56 publications

Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base

Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base

The influence of XTFs on risk and return of households’ investment portfolios

Retail Investor Behavior, Cryptocurrencies, and Financial Market Innovation – Insights from the 5th European Retail Investment Conference (ERIC)

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