Portfolio Reporting: How to Help individual Investors Learn from Past Mistakes

Topic & Objectives

Private investors make costly investment mistakes. Cronqvist and Siegel (2014) show that genetic predispositions can explain up to 45% of investment mistakes. The remaining 55% can be attributed to factors such as experience, circumstances, or events. This finding implies that the behavior of investors is not deterministic and may in principle be affected by training or information due to which, in turn, investors may learn how to avoid their mistakes.

Research has tested several potential solutions in order to devise remedies for investment mistakes. Examples include studies providing simplified information on investment products and studies based on providing financial advice. While these strands of research have been studied extensively, the provision of feedback on investment performance, trading costs and diversification has not received much attention yet. Most banks do not provide private investors with feedback on their investment decisions or use of banks’ brokerage services. A survey conducted in Germany shows that only 1 out of 120 banks regularly informed a small group of their customers about the risk, return and costs of their portfolios over the previous year, see Stiftung Warentest (2013). All other financial services providers fulfill only their statutory duties and provide information on holdings, volumes, current market-prices, the position value and in some case the purchase price of the position. There is no information on the portfolio except for its current total value.

We test in a field experiment if feedback on risk, return, costs, and portfolio diversification contributes to improving investment decisions. We design four different one-page reports by drawing on findings from research on decision-making and behavioral economics and randomly assign clients to the different report designs. Over an eighteen-month period we provide more than 1,500 investors with feedback on the development of their securities account, their returns, trading costs and risk-levels as well as their level of diversification.

Key Findings

• Our results support the view that providing investors with “post-contractual” feedback on their portfolio helps them improve investment decisions. After receiving reports, investors trade less, diversify more and have a higher risk-adjusted performance relative to the control group. These effects become stronger over time. Results are robust to potential outliers and are not driven by information overload. The results are neither driven by attrition nor by the time when investors register for receiving reports.
• The effects do not differ much between the different report designs. It seems that it is more important to provide investors with relevant feedback, rather than a specific format in which it is delivered.
• The reports containing peer information do not seem to be particularly useful to investors. This finding also suggests that the reports induce the change but are likely not the only source of investors’ improved decisions.
• Our study shows that the introduction of a regular securities account reporting helps online brokerage customers. Can we infer that it may also help the average stock market participant? As our results do not change when we focus on the very literate investors only, we believe this might be the case. To test whether the reports would benefit also less sophisticated and less active investors, we separate our sample into two subgroups according to investors’ likelihood to subscribe to our report. We find that both subgroups would equally benefit from the reports. Therefore, if shrouding was present in household investing and an implicit wealth transfer from sophisticated to less sophisticated investors took place, this study suggests that feedback could be part of a solution.

Policy Implications

There is no incentive in the market to overcome shrouding and our results suggest that it may not be in the broker’s interest to provide feedback to investors as they ultimately start trading less. In any case, the provision of this kind of feedback is costly and difficult to gather and edit, not only for the investor herself but also for any third party. Therefore, it might be worth considering a policy intervention.