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Protecting Investors from Themselves: Evidence from a Regulatory Intervention

Abstract Retail investors tend to make poor investment decisions and consequently under-perform. A plausible approach to improving this situation is to restrict the least knowledgeable or experienced investors, a concept implemented for Singapore investors via a Customer Knowledge Assessment (CKA). I study the empirical relationship between retail investors’ investment portfolio outcomes, and their CKA results. Although those satisfying the assessment criteria made fewer mistakes, as benchmarked by a selection of normative models, the CKA only weakly identifies less skilled investors. The high misclassification rate, under an analysis favorable to the scheme, highlights the challenges of investor screening.