Abstract
Digital technology in financial services is helping consumers gain wider access to investment funds, acquire these funds at lower costs, and customize their own investments. However, direct digital access also creates new challenges because consumers may make suboptimal investment decisions. We address the challenge that consumers often face complex investment decisions involving multiple funds. Normative optimal asset allocation theory prescribes that investors should simultaneously optimize risk–returns over their entire portfolio. We propose two behavioral effects (mental separation and correlation neglect) that prevent consumers from doing so and a new choice architecture of virtually integrating investment funds that can help overcome these effects. Results from three experiments, using general population samples, provide support for the predicted behavioral effects and the beneficial impact of virtual integration. We find that consumers’ behavioral biases are not overcome by financial literacy, which further underlines the marketing relevance of this research.
Highlights
Recent advances in digital technology in the finance industry allow consumers to more invest in many different investment funds
To determine the objective benefits of the virtual integration of funds, we propose to determine how far investors are removed from the optimal capital allocation line (CAL) when they decide on the risk– return levels for investment funds separately
To investigate the effect of virtually integrating the two investment funds, we compared the risk–return profiles of the investment portfolios that were chosen by participants in the virtually integrated condition and those chosen in the separate condition
Summary
Recent advances in digital technology in the finance industry allow consumers to more invest in many different investment funds. Consumers can bypass financial advisors and customize their own investment portfolios by directly purchasing funds online. Two more measures were included to explore consumers’ awareness of the correlations between the distributions and their tendency to form separate mental accounts for different investment funds. To measure how well participants were aware of the correlation between the investment returns, we employed the following approach. Based on their experiences with the funds in the tool, participants were asked to infer what the most likely outcome of one fund would be when they knew that the other fund had returned a loss on the investment. Participants were asked to assess how likely (on a scale from 0 to 10) they were to transfer money from one account to another account when each account had a different investment goal
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