Abstract

This paper aims to uncover the decision processes used by average investors, including their investment goals, the information sets they consider, and the number of factors that influence high-stakes financial decisions. We present new experimental and survey data collected from bank customers at several Italian banks. Most subjects use a strict subset of the information available to them, ignoring variables that standard economic models typically assume drive investors behavior. Fast and information-frugal heuristics model the information search of many subjects observed in this study, reflecting a noncompensatory-lexicographic hierarchy of features, risk, time horizon and cost, considered in that order. Decision behavior reflects a simple combination of a fast and frugal tree and a tallying rule, predicting 78% of investors decisions.