An experiment on the impacts of experiential investment advice

An experiment is conducted in which investment advice is passed from one cohort to the next. Participants make asset allocation decisions for thirty years to a safe and risky asset and provide annual forecasts (beliefs) on the return on the risky asset. Risky asset returns are drawn from the price returns on the S&P 500 from 1921-2010; Cohorts 1/2/3 received the actual returns in the time period from 1921-1950/1951-1980/1981-2010 respectively. Results show that negative investment advice passed from Cohort 1 to Cohort 2 leads to: 1) significantly lower allocations to the risky asset in Cohort 2 compared to Cohort 1; and 2) a 19% difference in allocations between cohorts who received either positive advice or negative advice in Cohort 2. A second experiment examines the effect on Cohort 3 from receiving consistent and mixed advice from Cohorts 1 and 2. The results from the first experiment are replicated showing that positive (negative) advice received from prior cohorts leads to higher (lower) investment beliefs and portfolio allocations to a riskier asset. Statistical analyses are conducted to determine if the large differences in allocations are driven by changes in beliefs about future returns or changes in risk attitude. The primary takeaway is that experiential cohort advice has a significant impact on subsequent cohorts even when it has little informational value.