How Past Performance Framing Impacts Investors' Belief Updating

Abstract

Individual investors’ beliefs (return expectations and risk perceptions) drive investment decisions, with larger updates of beliefs leading to more active trading, hurting performance. We examine how framing of past performance information affects investors’ belief formation. In particular, we analyze whether presenting longer information horizons as a default option leads to smaller updates in beliefs. In a six-round experiment, we present 377 subjects with past performance information and subsequently measure updates of their beliefs. We employ three different frames, varying the default information horizon subjects are exposed to (annual, monthly, daily). Different from previous work, we allow subjects to easily and without costs opt out of the default and obtain past performance information on each of the three information horizons. In such a setting which more closely resembles investors’ actual decision-making environment, we find that in contrast to previous work, presenting returns over a longer information horizon is not necessarily beneficial. Only for subjects staying in their default information horizon, presenting portfolio performance over a longer information horizon has a mitigating effect on the magnitude of their belief updates. For subjects opting out of the default, we find the opposite effect. Especially more financially literate subjects switch out of the default.