What are Investors Willing to Pay to Customize Their Investment Product?

Abstract

Even though buy-and-hold (B&H) investment strategies can take into account the investor’s risk tolerance by fixing a suitable stock proportion, the outcome profiles of B&H strategies are restricted to a certain class of distributions. For investors with specific risk preferences, further customization should thus provide additional value. The paper’s objective is to investigate the strength of preference for such customized distributions and to draw conclusions about the demand for personalized investment products. In an experimental study, 149 participants could adjust the return distribution of an initially chosen B&H investment by use of an interactive software program. As our main finding, we observe that (1) most investors have a strong preference for customization and many are willing to pay so much for such customization that dominance violations result. As further interesting contributions to the literature, we observe that (2), on average, investors do not act skewness seeking during customization, (3) can be clustered into distinct subgroups via their adjustment patterns and (4) do not adjust the B&H distributions in accordance with individually elicited prospect theory parameters. In summary, we observe a strong willingness to pay for additional flexibility even though the actual benefits of customization vary largely by the individual.