IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v7y2019i3p42-d252708.html
   My bibliography  Save this article

What Are Investors Afraid of? Finding the Big Bad Wolf

Author

Listed:
  • Barbara Alemanni

    (Department of Economics (DIEC), University of Genoa, 16126 Genoa, Italy
    SDABocconi School of Management, Banking and Insurance Department, 20136 Milan, Italy)

  • Pierpaolo Uberti

    (Department of Economics (DIEC), University of Genoa, 16126 Genoa, Italy)

Abstract

The aim of financial institutions and regulators is to find an effective way to measure the risk profile of different segments of investors. Both economists and psychologists developed several methodologies to elicit and assess individual risk attitude, but these are not perfect and show several drawbacks when used in practice. Thanks to a unique database of around 15,000 investors, this paper combines survey-based evidence with revealed preferences based upon observed asset allocation. This paper confirms some results known in the literature like the gender and age differences in risk-taking. Moreover, the behavioral clustering approach used for the analysis is useful in an inferential framework. The segments built starting from the questionnaire permit to “forecast” the individual risk attitude that is described by the individual choices in terms of asset allocation. Loss aversion per se is a relevant variable in explaining financial risk-taking.

Suggested Citation

  • Barbara Alemanni & Pierpaolo Uberti, 2019. "What Are Investors Afraid of? Finding the Big Bad Wolf," IJFS, MDPI, vol. 7(3), pages 1-12, July.
  • Handle: RePEc:gam:jijfss:v:7:y:2019:i:3:p:42-:d:252708
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/7/3/42/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2227-7072/7/3/42/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rui Yao & Angela Curl, 2011. "Do Market Returns Influence Risk Tolerance? Evidence from Panel Data," Journal of Family and Economic Issues, Springer, vol. 32(3), pages 532-544, September.
    2. Menkhoff, Lukas & Schmidt, Ulrich & Brozynski, Torsten, 2006. "The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence," European Economic Review, Elsevier, vol. 50(7), pages 1753-1766, October.
    3. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1109-1150, December.
    4. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    5. Dorn, Daniel & Huberman, Gur, 2010. "Preferred risk habitat of individual investors," Journal of Financial Economics, Elsevier, vol. 97(1), pages 155-173, July.
    6. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    7. Cary Deck & Harris Schlesinger, 2014. "Consistency of Higher Order Risk Preferences," Econometrica, Econometric Society, vol. 82, pages 1913-1943, September.
    8. Xiaohao Ding & Joop Hartog & Yuze Sun, 2010. "Can we measure Individual Risk Attitudes in a Survey?," Tinbergen Institute Discussion Papers 10-027/3, Tinbergen Institute.
    9. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    10. Curley, Shawn P. & Yates, J. Frank & Abrams, Richard A., 1986. "Psychological sources of ambiguity avoidance," Organizational Behavior and Human Decision Processes, Elsevier, vol. 38(2), pages 230-256, October.
    11. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2012. "The Intergenerational Transmission of Risk and Trust Attitudes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 645-677.
    12. Dimmock, Stephen G. & Kouwenberg, Roy & Mitchell, Olivia S. & Peijnenburg, Kim, 2016. "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 119(3), pages 559-577.
    13. Grable, John & Lytton, Ruth H., 1999. "Financial risk tolerance revisited: the development of a risk assessment instrument," Financial Services Review, Elsevier, vol. 8(3), pages 163-181.
    14. Ding, Xiaohao & Hartog, Joop & Sun, Yuze, 2010. "Can We Measure Individual Risk Attitudes in a Survey?," IZA Discussion Papers 4807, Institute of Labor Economics (IZA).
    15. Thomas Dohmen & Armin Falk & Bart H. H. Golsteyn & David Huffman & Uwe Sunde, 2017. "Risk Attitudes Across The Life Course," Economic Journal, Royal Economic Society, vol. 127(605), pages 95-116, October.
    16. Jacob A. Bikker & Dirk W. G. A. Broeders & David A. Hollanders & Eduard H. M. Ponds, 2012. "Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 595-618, September.
    17. Lee, Boram & Veld-Merkoulova, Yulia, 2016. "Myopic loss aversion and stock investments: An empirical study of private investors," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 235-246.
    18. J. François Outreville, 2015. "The Relationship Between Relative Risk Aversion And The Level Of Education: A Survey And Implications For The Demand For Life Insurance," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 97-111, February.
    19. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    20. Bidisha Mandal & Brian E. Roe, 2014. "Risk Tolerance among National Longitudinal Survey of Youth Participants: The Effects of Age and Cognitive Skills," Economica, London School of Economics and Political Science, vol. 81(323), pages 522-543, July.
    21. Elke U. Weber & Richard A. Milliman, 1997. "Perceived Risk Attitudes: Relating Risk Perception to Risky Choice," Management Science, INFORMS, vol. 43(2), pages 123-144, February.
    22. Zeelenberg, Marcel & Beattie, Jane & van der Pligt, Joop & de Vries, Nanne K., 1996. "Consequences of Regret Aversion: Effects of Expected Feedback on Risky Decision Making," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(2), pages 148-158, February.
    23. Martin Weber & Elke U. Weber & Alen Nosić, 2013. "Who takes Risks When and Why: Determinants of Changes in Investor Risk Taking," Review of Finance, European Finance Association, vol. 17(3), pages 847-883.
    24. Daniel G. Goldstein & Eric J. Johnson & William F. Sharpe, 2008. "Choosing Outcomes versus Choosing Products: Consumer-Focused Retirement Investment Advice," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 35(3), pages 440-456, August.
    25. J.A. Bikker & D.W.G.A Broeders & D. A. Hollanders & E. H.M. Ponds, 2009. "Pension funds’ asset allocation and participant age: a test of the life-cycle model," Working Papers 09-25, Utrecht School of Economics.
    26. Charness, Gary & Gneezy, Uri, 2012. "Strong Evidence for Gender Differences in Risk Taking," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 50-58.
    27. Jeeva Somasundaram & Enrico Diecidue, 2017. "Regret theory and risk attitudes," Journal of Risk and Uncertainty, Springer, vol. 55(2), pages 147-175, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jim Engle-Warnick & Diego Pulido & Marine de Montaignac, 2016. "A Comparison of Survey and Incentivized-Based Risk Attitude Elicitation," CIRANO Working Papers 2016s-40, CIRANO.
    2. Divya Aggarwal & Pitabas Mohanty, 2022. "Influence of imprecise information on risk and ambiguity preferences: Experimental evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(4), pages 1025-1038, June.
    3. Gary Charness & Thomas Garcia & Theo Offerman & Marie Claire Villeval, 2020. "Do measures of risk attitude in the laboratory predict behavior under risk in and outside of the laboratory?," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 99-123, April.
    4. Matthias Brachert & Walter Hyll & Abdolkarim Sadrieh, 2020. "Entry into self-employment and individuals’ risk-taking propensities," Small Business Economics, Springer, vol. 55(4), pages 1057-1074, December.
    5. Aggarwal, Divya & Damodaran, Uday, 2020. "Ambiguity attitudes and myopic loss aversion: Experimental evidence using carnival games," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    6. Thomas Dohmen & Simone Quercia & Jana Willrodt, 2023. "On the psychology of the relation between optimism and risk taking," Journal of Risk and Uncertainty, Springer, vol. 67(2), pages 193-214, October.
    7. Sepahvand, Mohammad H & Shahbazian, Roujman & Bali Swain, Ranjula, 2018. "Does revolution change risk attitudes? Evidence from Burkina Faso," Working Paper Series 2019:2, Uppsala University, Department of Economics.
    8. Nicoletta Marinelli & Camilla Mazzoli & Fabrizio Palmucci, 2017. "Mind the Gap: Inconsistencies Between Subjective and Objective Financial Risk Tolerance," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 18(2), pages 219-230, April.
    9. Martin Koudstaal & Randolph Sloof & Mirjam van Praag, 2016. "Risk, Uncertainty, and Entrepreneurship: Evidence from a Lab-in-the-Field Experiment," Management Science, INFORMS, vol. 62(10), pages 2897-2915, October.
    10. Andreas Hack & Frauke Bieberstein & Nils D. Kraiczy, 2016. "Reference point formation and new venture creation," Small Business Economics, Springer, vol. 46(3), pages 447-465, March.
    11. Colasante, Annarita & Marini, Matteo M. & Russo, Alberto, 2017. "Incidental emotions and risk-taking: An experimental analysis," MPRA Paper 76992, University Library of Munich, Germany.
    12. Michela Faccioli & Laure Kuhfuss & Mikołaj Czajkowski, 2019. "Stated Preferences for Conservation Policies Under Uncertainty: Insights on the Effect of Individuals’ Risk Attitudes in the Environmental Domain," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 627-659, June.
    13. Fang, Guanfu & Li, Wei & Zhu, Ying, 2022. "The shadow of the epidemic: Long-term impacts of meningitis exposure on risk preference and behaviors," World Development, Elsevier, vol. 157(C).
    14. King, Michael & Singh, Anuj Pratap, 2020. "Understanding farmers’ valuation of agricultural insurance: Evidence from Vietnam," Food Policy, Elsevier, vol. 94(C).
    15. Cardak, Buly A. & Martin, Vance L., 2023. "Household willingness to take financial risk: Stockmarket movements and life‐cycle effects," Journal of Banking & Finance, Elsevier, vol. 149(C).
    16. Goytom Abraha Kahsay & Daniel Osberghaus, 2018. "Storm Damage and Risk Preferences: Panel Evidence from Germany," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(1), pages 301-318, September.
    17. Alserda, Gosse A.G. & Dellaert, Benedict G.C. & Swinkels, Laurens & van der Lecq, Fieke S.G., 2019. "Individual pension risk preference elicitation and collective asset allocation with heterogeneity," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 206-225.
    18. Heß, Moritz & Scheve, Christian von & Schupp, Jürgen & Wagner, Aiko & Wagner, Gert G., 2018. "Are Political Representatives More Risk-Loving Than the Electorate? Evidence from German Federal and State Parliaments," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 4, pages 1-7.
    19. Delphine Boutin & Laurène Petifour & Haris Megzari, 2022. "Instability of preferences due to Covid-19 Crisis and emotions: a natural experiment from urban Burkina Faso," Working Papers hal-03623601, HAL.
    20. Johannes G. Jaspersen & Marc A. Ragin & Justin R. Sydnor, 2020. "Linking subjective and incentivized risk attitudes: The importance of losses," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 187-206, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:7:y:2019:i:3:p:42-:d:252708. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.