Sina Borgsen Investment Decisions of Private Households and the Role of Financial Advice Inauguraldissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften der Universität Mannheim vorgelegt im Frühjahrs-/Sommersemester 2010 ii Dekan: Dr. Jürgen M. Schneider Referent: Professor Dr. Dr. h.c. Martin Weber Korreferent: Professor Dr. Bernd Helmig Tag der mündlichen Prüfung: 8. November 2010 iii Meiner Familie 1 Acknowlegements It is a pleasure to thank the many people who made this thesis possible. I am very grateful to my supervisor, Prof. Dr. Dr. h.c. Martin Weber, for countless helpful suggestions, numerous stimulating discussions, invaluable motivating support, and for some- times pushing me into the right direction. Many thanks are also due to Prof. Dr. Bernd Hel- mig, my second examiner. I would like to thank current and former colleagues at the University of Mannheim for many inspiring discussions, helpful comments and ideas: Anders Anderson, Ph.D., Dr. Martina Corsten, Christian Ehm, Dr. Silvia Elsland, Daniel Foos, Prof. Dr. Markus Glaser, Jun.-Prof. Dr. Jens Grunert, Heiko Jacobs, Christine Kaufmann, Dr. Volker Kleff, Jun.-Prof. Dr. Ale- xander Klos, Prof. Dr. Thomas Langer, Christoph Merkle, Sebastian Müller, Prof. Dr. Markus Nöth, Prof. Dr. Lars Norden, Dr. Alen Nosic, Dr. Adelson Pinon, Dr. Zacharias Sautner, Dr. Sava Savov, Ulrich Seubert, Daniel Smith, Dr. Philipp Schmitz, Dr. Sascha Steffen, Dr. Matt- hias Transier, and Dr. Frank Welfens. Furthermore, I appreciate the collaboration with mem- bers of the European Collaborative Research Project “Exploiting bounded rationality”. Special thanks go to Prof. Dr. Markus Glaser and Niels Nauhauser, who coauthored one chap- ter in this dissertation (chapter 5). I would like to thank the consumer center Baden- Württemberg e.V. for providing the data necessary for chapters 4 and 5 of this thesis. Special thanks also go to Johannes Habel for IT assistance on my first experimental research project, to Daniel Smith for proof-reading this thesis, and to many student research assistants for data preparation. Furthermore, I want to express my gratitude to many anonymous students at the University of Mannheim as well as private households in Baden-Württemberg who partici- pated in the experiments and questionnaires necessary for this thesis. Acknowledgements for funding are due to the Deutsche Forschungsgemeinschaft (DFG) and to the European Science Foundation (ESF). vi Most of all, I would like to thank my family and friends for their unlimited support. In partic- ular, I thank my mother Ilse Borgsen, as well as my sister Anja Borgsen who supported me throughout my whole life and on every educational step. I also thank my father Horst Borgsen who unexpectedly died in December 2009 but who was really keen on becoming a "Doctor’s father". Finally, I would like to thank my boyfriend Christian Thomsen who always encour- aged me and believed in me. He was there for me whenever I needed him. Mannheim, November 2010 Contents List of Figures .......................................................................................................................... xi List of Tables .......................................................................................................................... xiii List of Symbols and Abbreviations ....................................................................................... xv 1 General Introduction ........................................................................................................ 1 1.1 Motivation .................................................................................................................. 1 1.2 Outline of the Thesis and Main Results ..................................................................... 3 2 Financial Advice ................................................................................................................ 7 2.1 The Need for Financial Advice - Individual Investor Behavior ................................ 7 2.2 Potential Benefits of Advice - Professional Investor Behavior ................................. 9 2.3 Compensation Models and Conflicts of Interest ..................................................... 12 2.4 Performance of Advised versus Non-Advised Investors ......................................... 14 3 False Consensus and the Role of Ambiguity in Predictions of Others’ Risk Preferences ....................................................................................................................... 17 3.1 Introduction .............................................................................................................. 17 3.2 Methodology ............................................................................................................ 22 viii Contents 3.2.1 Study 1 ......................................................................................................... 22 3.2.2 Study 2 ......................................................................................................... 24 3.3 Results and Discussion ............................................................................................ 25 3.3.1 Analysis of Average Effects ........................................................................ 25 3.3.2 Individual Level Analysis ............................................................................ 27 3.4 Interval Analysis ...................................................................................................... 40 3.5 Conclusion ............................................................................................................... 46 3.6 Appendix A: Paper-Based Questionnaire ................................................................ 48 3.7 Appendix B: Order Effects ...................................................................................... 52 3.8 Appendix C: Median Split ....................................................................................... 53 3.9 Appendix D: Lottery Plots ....................................................................................... 55 3.10 Appendix E: Histograms and Twoway Graphs ....................................................... 58 4 German Household Portfolios ....................................................................................... 63 4.1 Introduction .............................................................................................................. 63 4.2 Related Literature and Hypotheses .......................................................................... 64 4.3 Data .......................................................................................................................... 69 4.4 Household Portfolios: Results and Discussion ........................................................ 72 4.4.1 Descriptive Statistics .................................................................................... 72 4.4.2 Bivariate Analyses ....................................................................................... 77 4.4.2.1 Age Effects .................................................................................. 78 4.4.2.2 Income Effects ............................................................................. 80 4.4.2.3 Financial Literacy Effects ........................................................... 81 4.4.3 Multivariate Analyses .................................................................................. 84 4.4.4 Diversification.............................................................................................. 90 Contents ix 4.5 Household Portfolios and Risk Tolerance ............................................................... 93 4.6 Conclusion ............................................................................................................. 105 5 The Willingness to Follow Financial Advice .............................................................. 107 5.1 Introduction ............................................................................................................ 107 5.2 Related Literature and Hypotheses ........................................................................ 110 5.3 Dataset and Descriptive Statistics .......................................................................... 114 5.3.1 Dataset........................................................................................................ 114 5.3.2 Descriptive Statistics .................................................................................. 116 5.4 Results and Discussion .......................................................................................... 119 5.4.1 Advice Acceptance .................................................................................... 119 5.4.2 Influence of Person-Related Attributes of the Decision Maker ................. 121 5.4.3 Influence of Person-Related Attributes of the Advisor.............................. 125 5.4.4 Influence of Motivation ............................................................................. 129 5.4.5 Influence of Option-Related Attributes ..................................................... 131 5.5 Robustness Checks ................................................................................................ 140 5.6 Conclusion ............................................................................................................. 144 5.7 Appendix A: Cover Letter and Questionnaire ......................................................