Framing effects of information on investment risk perception^*

ABSTRACT

The aim of this study is to verify whether the framing effects of past performance information affect the risk perception of individuals for fixed-income and variable income fund. We assess whether risk perception varies depending on how information is communicated to investors, considering the relevance of possible framing effects arising from how information is presented in investment funds’ prospectuses and reports. This study is aimed at investors (individual and institutional) and fund industry regulators, highlighting the importance of past performance presentation. This article aims to contribute to the area by investigating how investors are influenced by varying perceptions of risk and return on fixed-income and variable-income assets, depending on information presentation format. The approach used is based on a 2x2 factorial quasi-experiment, in which format (within-subject) and time horizon (between-subjects) effects are tested in a sample of 143 respondents. Our results indicate that, for investment in a variable-income fund, a monthly yield presentation format leads to higher perceived risk, and that a framing emphasizing fund value evolution leads to higher perceived returns. As for investment in a fixed-income fund, the framing that emphasizes fund value leads to both higher perceived risk and higher perceived returns. When comparing the results for the two types of investments, the risk perception was higher for variable-income than for fixed income funds. However, perceived returns were higher for fixed income than for variable-income funds due to the framing effect, although realized returns do not corroborate this perception.

Keywords:
framing effect; risk perception; investment funds; behavioral finance