Investment Behavior Under Cognitive Uncertainty

Abstract

In the context of decision-making, the individual is affected by many factors. One of them is confidence. In an experimental analysis, this paper presents various investment options including sure as well as returns with uncertain outcomes. Under consideration of the majority of research on that topic, this paper collects self-rated confidence statements and analyzes participants' portfolio allocation under uncertainty and risk. The findings are collected by considering various statistical models and analyzing underlying correlations. The results provide strong evidence that people choose to diversify when being uncertain. Additionally, this effect is supported by participants' perceived risk. Moreover, this diversification tends towards an equal-weighted portfolio allocation the more unconfident someone is. Furthermore, the analysis provides findings emphasizing drivers affecting peoples' confidence. While individuals' risk perception supports uncertainty, financial knowledge tends to impede it.