Ratings and Asset Allocation: An Experimental Analysis

September 2013

Financial product ratings are intended to summarize relevant information in a manner that assists in decision-making, but may be harmful. Ratings are often assigned within categories; ratings across categories may not be comparable. We assess the effect of ratings in an experiment where subjects always have complete information about the characteristics of the investments, they repeatedly make investment decisions, and there is minimial computational burden. Although ratings supply no information, categorized ratings affect investment decisions and harm performance. High-knowledge subjects make better decisions, but are also affected by categorized ratings. The effects are largely reversed when ratings no longer appear.