The Less You Know, the More You Are Afraid of—A Survey on Risk Perceptions of Investment Products

Abstract

We conducted a survey on risk perceptions of investment products in the German-speaking area of Switzerland. Unlike the typical two-factor structure documented in the previous literature, we found that knowledge-related scales were highly correlated with risk-related scales, whereas the correlation between perceived risk and historical risk measures was much lower. The respondents perceived those easier-to-understand products as less risky, which was likely driven by the familiarity bias. Our results are in line with the affect heuristic and risk-as-feelings hypotheses.

Keywords:

• Financial products
• Risk perception
• Familiarity heuristic
• Home bias

ACKNOWLEDGMENTS

Financial support from the members of the University Priority Program “Finance and Financial Market” and the National Center of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK), Project IPA1, “Behavioral and Evolutionary Finance” at the University of Zurich are gratefully acknowledged. We also are grateful for the financial support from the Swiss Finance Institute. We thank Joël Roth for allowing us to use part of the calculation of historical data from his bachelor's thesis. We are also grateful to Thorsten Hens for his support of this project.

Notes

1. We omit the asset class art/antique because of the difficulties of obtaining meaningful historical data.