N°25-78: Mental Framing Effects in Dynamic Portfolio Choice

We present experimental evidence of systematic decision errors in dynamic portfolio choice. Participants created contingency plans in a lattice model. When returns were independent and identically distributed, most plans were near-optimal for plausible risk preferences. However, under dynamic probabilities, most plans were inefficient, even by First-degree Stochastic Dominance. Allocations showed a lack of sensitivity to probability shifts, consistent with myopic loss aversion. Decision quality improved when participants compared their original plan to precomputed optimal plans. Results highlight the importance of problem framing in dynamic choice and support a libertarian paternalistic approach to choice architecture design.