How to warn inexperienced investors about risks: behavioural assessment summary
Many investors find a lengthy description of risks they can read about on websites of exchanges or brokers before buying securities too complicated to understand. As a result, people tend to overestimate the effects of considerable although not common threats such as issuers’ bankruptcy. On the other hand, they ignore the very possibility of smaller, however more likely, losses, such as a partial loss of funds following an early sale of securities when current prices are lower than purchase prices. Consequently, investors can take wrong decisions.
This follows from the behavioural assessment of the draft key information document (KID, or a financial product passport) in the securities market. The Bank of Russia carried it out in collaboration with the Financial Literacy Development Association.
The survey helped define how to improve the draft KID to briefly and clearly explain to investors the most significant and likely to occur events that might result in losses or lower incomes. It turned out that the best option is to limit the description to three major risks, while distorted perception of information is quite common among investors with no experience. Education, gender, family and employment statuses do not matter much.
Based on the survey findings, the Bank of Russia jointly with market participants plans to develop a master KID that will be employed as a basis to draft KIDs for individual issuers’ securities. In particular, they will be integrated into mobile applications for investors.
This is the third behavioural assessment performed by the Bank of Russia to develop regulation. The results of the first two assessments were used to prepare test questions for non-qualified investors and risk notifications, which are forwarded to those investors who failed to pass the test.