Abstract
Risk-taking is critical to decisions. Unfortunately, information about risk is not always available, and that the lack of information prompts people to use advice. A crucial question about using advice to deal with risk and uncertainty is how advice influences risk-taking, yet little research has investigated whether the effect of advice-following on risk-taking is unbiased. In two experimental studies in a financial investment context, we investigate whether investors are biased in following advice and how biased advice-following influences risk-taking. Furthermore, we investigate whether advice quality, decision environment, and justification moderate advice-following bias on risk-taking. We find that individual decision-makers follow advice across risk domains and advice quality when explained to the investors. However, we identify asymmetry in advice-following, with a bias for risk-seeking over risk-averse advice. This asymmetric effect is robust irrespective of the decision environment but limited to high-quality advice and explanations.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Data availability
The datasets generated during and/or analyzed during the current study are available from the corresponding author on reasonable request.
References
Barron, G., & Erev, I. (2003). Small feedback-based decisions and their limited correspondence to description-based decisions. Journal of Behavioral Decision Making, 16(3), 215–233. https://doi.org/10.1002/bdm.443
Benartzi, S., & Thaler, R. H. (1999). Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments. Management Science, 45(3), 364–381. https://doi.org/10.1287/mnsc.45.3.364
Benjamin, D., & Budescu, D. V. (2015). Advice from Experience: Communicating Incomplete Information Incompletely: Learning Mode and JAS. Journal of Behavioral Decision Making, 28(1), 36–49. https://doi.org/10.1002/bdm.1825
Beshears, J., Choi, J. J., Laibson, D., & Madrian, B. C. (2011). Can Psychological Aggregation Manipulations Affect Portfolio Risk-Taking? Evidence from a Framed Field Experiment. In NBER Working Paper 16868, National Bureau of Economic Research.
Billings, R. S., & Scherer, L. L. (1988). The effects of response mode and importance on decision-making strategies: Judgment versus choice. Organizational Behavior and Human Decision Processes, 41(1), 1–19. https://doi.org/10.1016/0749-5978(88)90043-X
Bluethgen, R., & Hackethal, A. (2008). Independent Financial Advisors and Household Portfolios. Available at SSRN: or https://doi.org/10.2139/Ssrn.1009238
Bonaccio, S., & Dalal, R. S. (2006). Advice taking and decision-making: An integrative literature review, and implications for the organizational sciences. Organizational Behavior and Human Decision Processes, 101(2), 127–151.
Charness, G., & Gneezy, U. (2012). Strong Evidence for Gender Differences in Risk Taking. Journal of Economic Behavior and Organization, 83(1), 50–58. https://doi.org/10.1016/j.jebo.2011.06.007
Gennaioli, N., Shleifer, A., & Vishny, R. (2015). Money Doctors. The Journal of Finance, 70(1), 91–114. https://doi.org/10.1111/jofi.12188
Gerhardt, R., & Hackethal, A. (2009). The Influence of Financial Advisors on Household Portfolios: A Study on Private Investors Switching to Financial Advice. Available at SSRN 1343607. https://doi.org/10.2139/ssrn.1343607
Gigone, D., & Hastie, R. (1993). The common knowledge effect: Information sharing and group judgment. Journal of Personality and Social Psychology, 65(5), 959–974. https://doi.org/10.1037/0022-3514.65.5.959
Gigone, D., & Hastie, R. (1997). The impact of information on small group choice. Journal of Personality and Social Psychology, 72(1), 132–140. https://doi.org/10.1037/0022-3514.72.1.132
Gönül, S., Önkal, D., & Goodwin, P. (2009). Expectations, use and judgmental adjustment of external financial and economic forecasts: An empirical investigation. Journal of Forecasting, 28(1), 19–37. https://doi.org/10.1002/for.1082
Gönül, S., Önkal, D., & Lawrence, M. (2006). The effects of structural characteristics of explanations on use of a DSS. Decision Support Systems, 42(3), 1481–1493. https://doi.org/10.1016/j.dss.2005.12.003
Goodwin, P., Sinan Gönül, M., & Önkal, D. (2013). Antecedents and effects of trust in forecasting advice. International Journal of Forecasting, 29(2), 354–366. https://doi.org/10.1016/j.ijforecast.2012.08.001
Gosling, S. D., Vazire, S., Srivastava, S., & John, O. P. (2004). Should We Trust Web-Based Studies? A Comparative Analysis of Six Preconceptions About Internet Questionnaires. American Psychologist, 59(2), 93–104. https://doi.org/10.1037/0003-066X.59.2.93
Haddad, A. D. M., Harrison, F., Norman, T., & Lau, J. Y. F. (2014). Adolescent and adult risk-taking in virtual social contexts. Frontiers in Psychology, 5. https://doi.org/10.3389/fpsyg.2014.01476
Halko, M.-L., Kaustia, M., & Alanko, E. (2012). The gender effect in risky asset holdings. Journal of Economic Behavior & Organization, 83(1), 66–81. https://doi.org/10.1016/j.jebo.2011.06.011
Hertwig, R., Barron, G., Weber, E. U., & Erev, I. (2004). Decisions from Experience and the Effect of Rare Events in Risky Choice. Psychological Science, 15(8), 534–539. https://doi.org/10.1111/j.0956-7976.2004.00715.x
Hertwig, R., & Erev, I. (2009). The description–experience gap in risky choice. Trends in Cognitive Sciences, 13(12), 517–523. https://doi.org/10.1016/j.tics.2009.09.004
Hills, T. T., & Hertwig, R. (2010). Information Search in Decisions From Experience. Psychological Science, 21(12), 1787–1792. https://doi.org/10.1177/0956797610387443
Hills, T. T., Noguchi, T., & Gibbert, M. (2013). Information overload or search-amplified risk? Set size and order effects on decisions from experience. Psychonomic Bulletin & Review, 20(5), 1023–1031. https://doi.org/10.3758/s13423-013-0422-3
Hinsz, V. B. (1999). Group Decision Making with Responses of a Quantitative Nature: The Theory of Social Decision Schemes for Quantities. Organizational Behavior and Human Decision Processes, 80(1), 28–49. https://doi.org/10.1006/obhd.1999.2853
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263. https://doi.org/10.2307/1914185
Kaufmann, C., Weber, M., & Haisley, E. (2013). The role of experience sampling and graphical displays on one’s investment risk appetite. Management Science, 59(2), 323–340. https://doi.org/10.1287/mnsc.1120.1607
Knight, F. H. (1921). Risk, Uncertainty, and Profit. Mifflin Company.
Krantz, J. H., & Dalal, R. (2000). Validity of Web-Based Psychological Research. In Psychological Experiments on the Internet (pp. 35–60). Elsevier. https://doi.org/10.1016/B978-012099980-4/50003-4
Kuziemko, I., Norton, M. I., Saez, E., & Stantcheva, S. (2015). How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments. American Economic Review, 105(4), 1478–1508. https://doi.org/10.1257/aer.20130360
LeClerc, J., & Joslyn, S. (2015). The Cry Wolf Effect and Weather-Related Decision Making: Crying Wolf and Weather-Related Decision Making. Risk Analysis, 35(3), 385–395. https://doi.org/10.1111/risa.12336
Monti, M., Pelligra, V., Martignon, L., & Berg, N. (2014). Retail investors and financial advisors: New evidence on trust and advice taking heuristics. Journal of Business Research, 67(8), 1749–1757. https://doi.org/10.1016/j.jbusres.2014.02.022
Müller, A. (2008). Anlageberatung bei Retailbanken. European Business School.
Önkal, D., Gönül, S., & Lawrence, M. (2008). Judgmental adjustments of previously adjusted forecasts. Decision Sciences, 39(2), 213–238. https://doi.org/10.1111/j.1540-5915.2008.00190.x
Paolacci, G., Chandler, J., & Ipeirotis, P. (2010). Running experiments on amazon mechanical turk. Judgment and Decision Making, 5(5), 411–419. https://doi.org/10.2139/ssrn.1626226
Payne, J. W., Payne, J. W., Bettman, J. R., & Johnson, E. J. (1993). The adaptive decision maker. Cambridge University Press.
Roth, B., Trautmann, S. T., & Voskort, A. (2016). The role of personal interaction in the assessment of risk attitudes. Journal of Behavioral and Experimental Economics, 63, 106–113. https://doi.org/10.1016/j.socec.2016.06.004
Roth, B., & Voskort, A. (2014). Stereotypes and false consensus: How financial professionals predict risk preferences. Journal of Economic Behavior & Organization, 107, 553–565. https://doi.org/10.1016/j.jebo.2014.05.006
Siegrist, M., Gutscher, H., & Earle, T. C. (2005). Perception of risk: The influence of general trust, and general confidence. Journal of Risk Research, 8(2), 145–156. https://doi.org/10.1080/1366987032000105315
Sniezek, J. A., & Buckley, T. (1995). Cueing and cognitive conflict in judge-advisor decision making. Organizational Behavior and Human Decision Processes, 62(2), 159–174. https://doi.org/10.1006/obhd.1995.1040
Sokolowska, J., & Makowiec, P. (2017). Risk preferences of individual investors: The role of dispositional tendencies and market trends. Journal of Behavioral and Experimental Economics, 71, 67–78. https://doi.org/10.1016/j.socec.2017.09.003
Sun, Q., Noguchi, T., Hills, T. T., & Gibbert, M. (2014). Paying for useless advice to resolve information overload. In P. Bello, M. Guarini, M. McShane, & B. Scassellati (Eds.), Proceedings of the 36th Annual Conference of the Cognitive Science Society. Cognitive Science Society.
van Rooij, M., Lusardi, A., & Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449–472. https://doi.org/10.1016/j.jfineco.2011.03.006
Vlaev, I., Nieboer, J., Martin, S., & Dolan, P. (2015). How behavioural science can improve financial advice services. Journal of Financial Services Marketing, 20(1), 74–88. https://doi.org/10.1057/fsm.2015.1
Vlaev, I., Stewart, N., & Chater, N. (2008). Risk Preference Discrepancy: A Prospect Relativity Account of the Discrepancy Between Risk Preferences in Laboratory Gambles and Real World Investments. Journal of Behavioral Finance, 9(3), 132–148. https://doi.org/10.1080/15427560802336673
Werner, J. (2008). Risk Aversion. In The New Palgrave Dictionary of Economics (pp. 1–6). Palgrave Macmillan. https://doi.org/10.1057/978-1-349-95121-5_2741-1
Xiao, Z., Wang, D., & Liu, Y. (2009). Economic Environment and Personality: How do they Influence Investment Decisions and Regret? Social Behavior and Personality: An International Journal, 37(10), 1297–1304. https://doi.org/10.2224/sbp.2009.37.10.1297
Yaniv, I. (2004a). Receiving other people’s advice: Influence and benefit. Organizational Behavior and Human Decision Processes, 93(1), 1–13. https://doi.org/10.1016/j.obhdp.2003.08.002
Yaniv, I. (2004b). The Benefit of Additional Opinions. Current Directions in Psychological Science, 13(2), 75–78. https://doi.org/10.1111/j.0963-7214.2004.00278.x
Yaniv, I., & Kleinberger, E. (2000). Advice Taking in Decision Making: Egocentric Discounting and Reputation Formation. Organizational Behavior and Human Decision Processes, 83(2), 260–281. https://doi.org/10.1006/obhd.2000.2909
Yates, J. F., Price, P. C., Lee, J. W., & Ramirez, J. (1996). Good probabilistic forecasters: The “consumer’s” perspective. International Journal of Forecasting, 12(1), 41–56. https://doi.org/10.1016/0169-2070(95)00636-2
Ye, L. R., & Johnson, P. E. (1995). The Impact of Explanation Facilities on User Acceptance of Expert Systems Advice. MIS Quarterly, 19(2), 157. https://doi.org/10.2307/249686
Funding
Beijing Institute of Technology Research Fund Program for Young Scholars (No. 3052022639)
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Ethics approval
All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki declaration and its later amendments or comparable ethical standards.
We followed standard ethical procedure at Università della Svizzera italiana at the time of data collection (2015), which did not provide or require ethical approval for non-invasive low-risk data collection of the kind we carried out in this study.
Consent to participate
Informed consent was obtained from all individual participants included in the study.
Competing interests
The authors have no competing interests to declare that are relevant to the content of this article.
Additional information
Publisher's note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendices
Appendix A. Demographic questionnaire
Appendix B
Table
Appendix C
Table
Appendix D. Experiment 1 instructions
Task instruction without advisor:
-
Thank you for participating our experiment.
-
You have 100 rounds where you can make an investment by clicking on two alternative investment opportunities. In each round, you have 1 dollar to invest.
-
After each round, the pay-off of that round will be shown and added to/reduced from your account. The 15% of the final amount will actually be paid into your MTurk account.
Task instruction with advisor:
-
Thank you for participating our experiment.
-
You have 100 rounds where you can make an investment by clicking on two alternative investment opportunities. In each round, you have 1 dollar to invest.
-
After each round, the pay-off of that round will be shown and added to/reduced from your account. The 1% of the final amount will actually be paid into your MTurk account.
-
You can ask the help of a financial advisor. You are free to ask (or not to ask) and take (or not to take) the advice. To ask for the advice, just click on the advisor and will tell you which option to choose.
Appendix E
Table
Appendix F
Table
Appendix G. Experiment 2 instructions
Task instruction without advisor:
-
Thank you for participating our experiment.
-
You have 100 rounds where you can make an investment by clicking on two alternative investment opportunities. In each round, you have 1 dollar to invest.
-
After each round, the pay-off of that round will be shown and added to/reduced from your account. The 15% of the final amount will actually be paid into your MTurk account.
Task instruction with advisor:
-
Thank you for participating our experiment.
-
You have 100 rounds where you can make an investment by clicking on two alternative investment opportunities. In each round, you have 1 dollar to invest.
-
After each round, the pay-off of that round will be shown and added to/reduced from your account. The 15% of the final amount will actually be paid into your MTurk account.
-
You can ask the help of a financial advisor. You are free to ask (or not to ask) and take (or not to take) the advice. To ask for the advice, just click on the visor and will tell you which option to choose.
Appendix H
Table
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Sun, Q., Gibbert, M., Hills, T. et al. Followers of financial advisors favor risky advice. Curr Psychol 43, 10086–10102 (2024). https://doi.org/10.1007/s12144-023-05134-7
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12144-023-05134-7