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A test of the relevant association between utility theory and subjective risk tolerance: Introducing the Profit-to-Willingness ratio

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  • Heo, Wookjae
  • Grable, John E.
  • Rabbani, Abed G.

Abstract

The purpose of this study was to document the empirical linkage between an objective risk tolerance utility function and a subjective risk tolerance scale. This study utilized return data from 2008 through 2013 for the S&P 500 as a proxy for the objective risk tolerance utility function and risk tolerance data obtained from a multidimensional psychometrically designed financial risk tolerance scale. Results from this study add to the literature by introducing the Profit-to-Willingness ratio (P/W ratio) and by showing investments in the stock market exhibit strong associates with the risk attitudes and preferences of investors. It was determined that an increase in the S&P 500 was associated with a decrease in aggregate risk tolerance during the period of analysis, whereas a decrease in the index increased willingness to take financial risk during the same period.

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  • Heo, Wookjae & Grable, John E. & Rabbani, Abed G., 2018. "A test of the relevant association between utility theory and subjective risk tolerance: Introducing the Profit-to-Willingness ratio," Journal of Behavioral and Experimental Finance, Elsevier, vol. 19(C), pages 84-88.
    • Handle: RePEc:eee:beexfi:v:19:y:2018:i:c:p:84-88
    DOI: 10.1016/j.jbef.2018.05.003
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    1. Rabbani, Abed G. & Yao, Zheying & Wang, Christina, 2019. "Does personality predict financial risk tolerance of pre-retiree baby boomers?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 124-132.
    2. Wookjae Heo & Abed G. Rabbani & Jae Min Lee, 2021. "Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 26(3), pages 169-180, September.
    3. Yao, Zheying & Rabbani, Abed G., 2021. "Association between investment risk tolerance and portfolio risk: The role of confidence level," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    4. Wang, WuChang & Zhang, Yi & Li, YuXing & Hu, Qihui & Liu, Chengsong & Liu, Cuiwei, 2022. "Vulnerability analysis method based on risk assessment for gas transmission capabilities of natural gas pipeline networks," Reliability Engineering and System Safety, Elsevier, vol. 218(PB).

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