Ratings and Asset Allocation: An Experimental Analysis

Robert L McDonald, Thomas Rietz

Research output: Working paper

Abstract

Ratings are common in financial markets and have the potential to be either helpful or harmful. Ratings are often assigned within categories, and ratings across categories may or may not be comparable. We experimentally assess the effect of ratings in a setting where subjects repeatedly make investment decisions and have full information about the characteristics of the investments. Ratings supply no additional information. We find that ratings affect investment decisions and that categories can harm performance. The effects partly vanish when ratings no longer appear. Subjects scoring higher on a test of financial knowledge peform better, including being less prone to naively diversify, behavior which is harmful in our setting. We conclude that ratings affect decisions even in a context where they convey no information.
Original languageEnglish (US)
Number of pages59
StatePublished - Apr 22 2013

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