Abstract
Risk simulations based on experience sampling were found to significantly improve initial investment decisions. We analyze the advantages and limitations of risk simulations in a setting in which investors can adjust their investment strategy before the end of the investment horizon. Our experimental results underscore the positive effects of risk simulations on investors’ understanding of the risk-return trade-off. Furthermore, we find that investors who are informed via description require multiple investment periods until they show stable average risk-taking behavior and similar allocations to the risky asset as investors informed via risk simulations. We do not find any effects of initial simulation-based learning on investors’ trading volume or trading behavior with regard to previous investment outcomes.
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