Digital customization of consumer investments in multiple funds: virtual integration improves risk-return decisions

Digital technology in financial services is helping consumers gain wider access to investment funds, acquire these funds at lower costs, and customize their own investments. However, direct digital access also creates new challenges because consumers may make suboptimal investment decisions. We address the challenge that consumers often face complex investment decisions involving multiple funds. Normative optimal asset allocation theory prescribes that investors should simultaneously optimize risk-returns over their entire portfolio. We propose two behavioral effects (mental separation and correlation neglect) that prevent consumers from doing so and a new choice architecture of virtually integrating investment funds that can help overcome these effects. Results from three experiments, using general population samples, provide support for the predicted behavioral effects and the beneficial impact of virtual integration. We find that consumers' behavioral biases are not overcome by financial literacy, which further underlines the marketing relevance of this research.

Automated summary

Digital technology in financial services is enabling consumers to access investment funds more widely, at lower costs, and customize their investments. However, direct digital access also poses challenges as consumers may make suboptimal investment decisions. This research introduces two behavioral effects and a new choice architecture to help consumers overcome these challenges.