Mitigating Bias I - Articles

Question 1

What are the main findings in the article by Bhattacharya et al. (2012)?

Answer 1

Examines what happens if unbiased financial advice is offered to people.

Investors who most need the financial advice are least likely to obtain it.
Investors who do obtain advice, hardly follow the advice and do not improve their portfolio efficiency by much.

Results imply that the mere availability of unbiased financial advice is a necessary but not sufficient condition for benefiting retail investors.

Question 2

What are the 5 measures of portfolio efficiency in the Bhattachary paper?

Answer 2

1. MPPM (Manipulation proof performance measure) = better Sharpe Ratio
2. Sharpe Ratio = risk-adjusted portfolio performance
3. HHI (Herfindahl-Hirschman Index) = measures the concentration in a portfolio
4. Idiosyncratic variance share = measures the diversification in a portfolio

-> the lower the HHI and idiosyncratic share, the better the diversification.

5. Home bias = measures the allocation of assets between domestic and international markets

-> the lower the home bias, the better the diversification.

Question 3

What are possible reasons why advice is not being sought?

Answer 3

1. Lack of financial sophistication.
2. Desire to not increase tax payments.
3. Lack of familiarity and/or trust.

Question 4

What are the main findings in the paper by Hershfield et al. (2011)?

Answer 4

Study 1: participants in future self condition allocated more than twice as much money to the retirement account.

Study 2: vivid exposure to ones future self in a immersive virtual reality environment, compared with exposure to another person’s older avater, led to increased saving in both short and long-term decision-making tasks

Study 3a/b: participants in the future self condition allocated a higher percentage of pay to retirement than participants in the current self condition.

Question 5

What are the four different studys in the paper by Hershfield et al. (2011)?

Answer 5

1. Participants are put inside a visual representation of their body and face (vivid version) as they will approx. look in the future. Participants in the future self-condition are predicted to allocate more money to retirement.
2. Participants are exposed to either their own aged avatar or another research participants aged avater. Participants who interacted with their own future avatar would demonstrate greater willingness to save in both short-term and long-term decision making tasks.

3a. They photographed each participants making happy, sad or neutral faces and age-processed these photos. When using the slider to allocate the retirement income, the face is shown either sad (low retirement income) or happy (high retirement income).
->participants in the future self condition allocated higher percentage of pay to retirement.

3b. To account for the bias that participants just moved the slider to the happy face, they were now confronted with neutral faces. Results hold!

Question 6

What is the managerial implication of the article by Hershfield?

Answer 6

Vivid representations of peoples future selves should increase their future orientation of saving decisions.