Nudging against panic selling: Making use of the IKEA effect

A typical behavioral pattern of investors is to reduce stock market exposure after a crash. This leads to a typical "buy high, sell low'' strategy that is detrimental to long-run wealth accumulation. We suggest a simple nudge based on the IKEA effect and the endowment effect that reduces this problem substantially: actively involving investors in the selection process of the risky investments, while restricting their selections in a way that preserves a large degree of diversification. The "self-assembled'' portfolio is, indeed, less likely to be sold off: in an experiment with N=219 university students, we show that this nudge reduces panic selling significantly. In fact, it makes a difference that is at least as big as the difference between experienced and inexperienced investors. (C) 2021 Elsevier B.V. All rights reserved.