Causal Effects of Linguistic Uncertainty on Risk Perception and Investment Behavior

Financial disclosures such as earnings calls help investors allocate their resources efficiently by providing them with essential information about the underlying assets. Especially in forward-looking statements, such disclosures may contain large shares of uncertain words, for example, "we believe," "probably," or "vague." While preliminary evidence hints that such language may influence risk perception and investment behavior, no study has explored the causal effects of linguistic uncertainty on financial decision-makers. We address this research gap by presenting a controlled laboratory experiment exposing investors to earnings call excerpts with randomized levels of uncertainty. The subjects were engaged in an investment game and asked to answer an extensive questionnaire covering risk perception and individual characteristics such as Big 5 personality and financial literacy. Empirically, we observe a significant positive impact of linguistic uncertainty on risk perception and a significant negative impact on the amount invested. Furthermore, we find that the effect of uncertainty on investment decisions is amplified by risk perception. Investor characteristics that significantly affect their risk perception include gender, age, income, extraversion, and neuroticism. Overall, we find causal evidence that the linguistic uncertainty of financial disclosures has a detrimental effect on investments