A rundown of research from different countries reveals how different styles of disclosure affect investor decisions
About a month after the Investment Funds Institute of Canada (IFIC) released a report on applying behavioural economics in the context of investment disclosures and advice, the International Organization of Securities Commissions (IOSCO) has released its own report summarizing insights on the use and design of disclosures. The report provided information on different behavioural research studies conducted by IOSCO member countries.
One academic study funded by US FINRA has revealed that changing the level of return disclosure (from weekly to six-month periods, for example) is unlikely to impact portfolio risk-taking in real-life financial portfolios. Another US FINRA-funded study found that while the use of a summary prospectus was not found to change investors’ portfolio choices, it allowed them to make decisions more quickly.
Another significant finding came from an academic laboratory experiment conducted using summary disclosures that were prescribed and independently tested by the Australian Securities and Investments Commission (ASIC). The experiment found that conveying asset-allocation information in pie-chart form disproportionately influenced investors into making choices based on “naïve diversification”; they tended to choose investments with more numerous and evenly weighted asset-class allocations, while having less regard for information on expected returns and risk.
A wide-ranging study by Italy’s CONSOB covered a population of investors under 70 years old and presented them with different disclosure templates that framed risk, return, and cost information on four investment products (two bonds and two stocks) in different ways. It revealed that investors’ risk preferences and financial decisions were swayed by the way disclosures were presented. In addition, people varied in their ability to use and understand each template, and no option was optimal for all the investors who participated.
One study by the Netherlands AFM went beyond disclosures in client reports by studying how statements in marketing materials influenced people’s attitudes and behaviour. It found that putting a required warning in advertisements for consumer credit (“Caution! Borrowing money costs money”) did not appear to affect consumer behaviour in the short term. On the other hand, references to regulatory oversight in investment advertisements lead to significant increases in willingness to invest and decreases in perceived risks.
The IOSCO report also waded into the realm of wealth-management technology with a section on how online interfaces could help or affect retail investor behaviour. Among other findings, US FINRA has learned that presenting an online financial prospectus with accordion navigation design can help novice users, but could adversely affect experienced investors; showing consumers online comments from others could help non-expert investors make better decisions; and internet technology can be leveraged to let people choose the level of detail they receive and their preferred presentation (e.g., dollar amounts vs. percentages).
Another effort by ASIC tapped an online community of Australians who either had retirement accounts or were creating one. It found that people were sensitive to small changes in size, order, consistency, placement, format, and terminology. In addition, people varied in how they wanted their information to be presented and how confident they were that they’d use the dashboards in the “real world.”
