Framing effects and risk perception: The effect of prior performance presentation format on investment fund choice

Many individuals find it difficult to make decisions about long-term saving e.g. towards retirement. Financial regulators are concerned that providers of financial services can ‘cherry pick’ past performance information and present this selectively in their promotional materials. However, although prior research shows that past investment performance is generally not useful to retail investors in predicting future returns, these consumers continue to place emphasis on this information in their investment decisions. Because graphical information can be displayed selectively in a self-serving manner, it is important to test for any effect of prior performance presentation format on investor judgements. In this study, we use actual past performance charts in a controlled experiment to investigate whether (i) the format in which information is provided, and (ii) the timescale of the information provided, affects the investment fund choice of ordinary individuals. We find evidence that presenting past information in terms of fund values or percent yields significantly affects investment fund preference and perceptions of risk and return, but that the timescale of past performance information has no such impact. We discuss our results in the light of prior behavioral finance research and suggest policy implications for regulators.