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James E. Corter - One of the best experts on this subject based on the ideXlab platform.
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does investment Risk Tolerance predict emotional and behavioural reactions to market turmoil
International Journal of Behavioural Accounting and Finance, 2011Co-Authors: James E. CorterAbstract:To assess if Risk attitudes play a role in individual investors' reactions to adverse events in financial markets, members of a university community (N = 102) were administered a Risk Tolerance instrument. Additional survey items asked about financial, emotional and behavioural effects of the market downturn that began in Fall 2008. Attitudes towards Risk and towards uncertainty, and investor experience, were positively correlated with Riskiness of the individuals' self–reported investment portfolio. Causal modelling confirmed that investment Risk Tolerance predicts actual Risk in the investor's portfolio; which predicted losses in portfolio value during the recent market disruptions. Portfolio losses correlated with negative emotional reactions, which together with Risk Tolerance predicted self–reported changes in investment strategy. In sum, investors' emotional reactions to losses may be mitigated by higher levels of Risk Tolerance, yet higher levels of Risk Tolerance are associated with Riskier portfolios, and thus to larger losses in a market downturn.
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Do Investment Risk Tolerance Attitudes Predict Portfolio Risk?
Journal of Business and Psychology, 2005Co-Authors: James E. Corter, Yuh-jia ChenAbstract:We investigated a new instrument designed to assess investment Risk Tolerance, the Risk Tolerance Questionnaire (RTQ). RTQ scores were positively correlated with scores on two other investment Risk measures, but were not correlated with a measure of sensation-seeking (Zuckerman, 1994 ), suggesting that investment Risk Tolerance is not explainable by a general cross-domain appetite for Risk. Importantly, RTQ scores were positively correlated with the Riskiness of respondents’ actual investment portfolios, meaning that investors with high Risk-Tolerance score tend to have higher-Risk portfolios. Finally, respondents with relatively more investment experience had more Risk-tolerant responses and higher-Risk portfolios than less experienced investors.
Yuh-jia Chen - One of the best experts on this subject based on the ideXlab platform.
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Do Investment Risk Tolerance Attitudes Predict Portfolio Risk?
Journal of Business and Psychology, 2005Co-Authors: James E. Corter, Yuh-jia ChenAbstract:We investigated a new instrument designed to assess investment Risk Tolerance, the Risk Tolerance Questionnaire (RTQ). RTQ scores were positively correlated with scores on two other investment Risk measures, but were not correlated with a measure of sensation-seeking (Zuckerman, 1994 ), suggesting that investment Risk Tolerance is not explainable by a general cross-domain appetite for Risk. Importantly, RTQ scores were positively correlated with the Riskiness of respondents’ actual investment portfolios, meaning that investors with high Risk-Tolerance score tend to have higher-Risk portfolios. Finally, respondents with relatively more investment experience had more Risk-tolerant responses and higher-Risk portfolios than less experienced investors.
Urvi Neelakantan - One of the best experts on this subject based on the ideXlab platform.
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ESTIMATION AND IMPACT OF GENDER DIFFERENCES IN Risk Tolerance
Economic Inquiry, 2010Co-Authors: Urvi NeelakantanAbstract:I. INTRODUCTION Are women systematically less Risk-tolerant than men? The answer has critical implications for the financial well-being of women (Schubert et al., 1999). For example, corporations may pass women over for promotion if it is believed that they are unable to make Risky financial decisions (Johnson and Powell, 1994). Financial advisers, believing that women are less Risk tolerant, may recommend conservative portfolios that have lower returns (Wang, 1994). This paper uses a simple model of individual portfolio choice to estimate the distributions of Risk Tolerance for women and men. Moments of the model are matched to data on Individual Retirement Accounts (IRAs) from the Health and Retirement Study (HRS) to obtain estimates of the distributions' parameters. Under the assumption of constant relative Risk aversion (CRRA) utility, results show that the mean Risk Tolerance is 0.25 for women and 0.28 for men. Economists generally assume that Risk aversion, the reciprocal of Risk Tolerance, falls in the 0-10 range (Jagannathan and Kocherlakota, 1996). The estimates obtained in this paper are consistent with this assumption. The impact of the results is gauged in the context of gender differences in wealth accumulation. Less Risk-tolerant individuals are more conservative investors. Conservative investments can lead to low levels of wealth accumulation and may account for the gender gap in wealth (Lyons et al., 2008). Data on older Americans from the HRS show that men have 103% more wealth in their IRAs than do women. (1) The results from this paper show that gender differences in Risk Tolerance alone would lead to men accumulating 10% more wealth than women. Gender differences in Risk Tolerance can thus account for nearly 10% of the gap in wealth accumulation. By comparison, gender differences in earnings can account for 51% of the wealth gap. The results have implications for recent economic and policy changes that are making individuals increasingly responsible for their own financial security. Financial security depends greatly on the ability to accumulate adequate retirement wealth (Wolff, 1998). The results suggest that while the difference in Risk Tolerance does contribute to the gender gap in wealth accumulation, the role of the gender gap in earnings remains a primary concern. II. LITERATURE REVIEW Gender differences in Risk Tolerance have been observed in responses to survey questions and Risk-Tolerance instruments. The National Longitudinal Survey of Youth 1979 (NLSY79) and the HRS both include a series of questions about choosing between two jobs, one that pays respondents their current income with certainty and the other that has a 50-50 chance of doubling their income or reducing it by a certain fraction. Analyzing the HRS question, Barsky et al. (1997) found that men tended to be somewhat more Risk-tolerant than women. Spivey (2008) corroborated this finding using the NLSY79. Grable and Lytton (1998) and Sung and Hanna (1996) studied the responses to a subjective Risk-Tolerance question in the Survey of Consumer Finances (SCF) and concluded that women were significantly less Risk-tolerant than men. Grable (2000) used a used a 20-item instrument to assess Risk Tolerance among faculty and staff at a university and also found that women were less Risk-tolerant than men. Researchers have also made inferences about women's Risk Tolerance based on observed wealth accumulation and investment choices. Using SCF data, Jianakoplos and Bernasek (1998) found that as individuals' wealth increased, the proportion of wealth held in Risky assets increased for both men and women, but the effect was significantly smaller for single women. They concluded that single women were less Risk-tolerant than single men. Dwyer et al. (2002) found that women took less Risk than men in their mutual fund investment decisions. However, the impact of gender on Risk-taking was reduced significantly when controlling for the investor's financial knowledge. …
Gianni Brighetti - One of the best experts on this subject based on the ideXlab platform.
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Misclassifications in financial Risk Tolerance
Journal of Risk Research, 2014Co-Authors: Caterina Lucarelli, Pierpaolo Uberti, Gianni BrighettiAbstract:This paper analyses the empirical Risk Tolerance of individuals and the role of physiological measures of Risk perception. By using a test that mimics the financial decision process in a laboratory setting (N = 445), we obtained an ex-post empirical measure of individual Risk Tolerance. Predictive classification models allow us to evaluate the accuracy of two alternative Risk-Tolerance forecasting methods: a self-report questionnaire and a psycho-physiological experiment. We find that accuracy of self-assessments is low and that misclassifications resulting from questionnaires vary from 36 to 65%: individuals asked to self-evaluate their Risk Tolerance reveal a high probability of failing their judgement, i.e. they behave as Risk takers, even if, before the task, they define themselves as Risk averse (and vice versa). Conversely, when the Risk-Tolerance forecast is obtained from individuals’ physiological arousal, observed via their somatic activation before Risky choices, the rate of misclassification is...
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Misclassifications in Financial Risk Tolerance
SSRN Electronic Journal, 2012Co-Authors: Caterina Lucarelli, Gianni Brighetti, Pierpaolo UbertiAbstract:This paper analyzes the empirical Risk Tolerance of individuals. Rare empirical evidence shows the role of personal behavior in both propensity toward financial Risk and Risk aversion. By using a test which mimics the financial decision process in a laboratory setting for 445 individuals, we obtained an ex-post experimental measure for individual Risk Tolerance. Predictive classification models allow us to evaluate the forecasting accuracy of two alternative Risk Tolerance assessments: a psychometrically derived questionnaire and a psycho- physiological experiment. Our findings show that misclassifications resulting from the questionnaire are massive: individuals asked to self-assess their Risk Tolerance reveal a high probability of failing their judgment, i.e., they behave as if they were Risk takers, while defining themselves as Risk-averse (and vice versa). Conversely, when considering somatic activation, misclassifications are considerably lower. Emotions are confirmed to drive the financial Risk- taking process, enhancing the accuracy of the individual Risk Tolerance forecasting activity.
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Errors in Individual Risk Tolerance
Bank Strategy Governance and Ratings, 2011Co-Authors: Caterina Lucarelli, Gianni BrighettiAbstract:This paper focuses on Risk Tolerance, which works as a relevant feature affecting financial decision-making. Specifically, financial Risk Tolerance may be defined as ‘the maximum amount of uncertainty someone is willing to accept when making a financial decision’ (Grable, 2008). Theoretically, financial Risk Tolerance depends upon different dimensions of Risk. Weber et al. (2002) refer to Risk attitude as ‘a person’s standing on the continuum from Risk aversion to Risk seeking’ (p. 222), and they contend that the degree of Risk-taking is highly domain-specific. Risk-averse individuals in one domain (e.g., financial choices) may not behave consistently across other domains (sports, social skills...). In a word, Risk taking behaviour is multidimensional. From the perspective of financial planners (Cordell, 2002; Boone and Lubitz, 2003), financial Risk Tolerance can be defined as a combination of both ‘Risk attitude’ (how much Risk I choose to take) and ‘Risk capacity’ (how much Risk I can afford to take). Nevertheless, these two components of Risk Tolerance are intrinsically different: Risk attitude is a psychological attribute (Weber et al., 2002, also refer to it as a personality trait), whereas Risk capacity is principally a financial attribute.
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Errors in Individual Risk Tolerance
SSRN Electronic Journal, 2010Co-Authors: Caterina Lucarelli, Gianni BrighettiAbstract:This paper focuses on Risk Tolerance which clearly influences financial decision making. We explore the emotional side of a Risk taking behaviour, comparing alternative measures of financial Risk Tolerance resulting from the consilience of various disciplines. We wonder whether we financially act as we are or as we are supposed to be. Thus we measure first, an unbiased Risk Tolerance (UR), which is obtained from the psycho physiological reactions of individuals taking Risk in laboratory experimental settings; second, a biased Risk Tolerance (BR) obtained through a psychometrically validated questionnaire. Finally we compare these indicators with Risks assumed in the real-life. Our findings confirm that people tend to behave coherently to their self-representation and almost in stark contrast to what they feel. Nevertheless, experiments conducted on more than 440 individuals, with a large presence of trader and asset managers allow us to prove evidence of an ‘unconscious sleeping factor’ which is remarkable when the unbiased Risk is much higher than the Risk assumed in real life but, at the same time, higher than the self-evaluation. Our findings induce us to propose a model of mental functioning that places rationality and emotion side by side to a third factor: the counterfactual thinking and the wandering mind. The sleeping factor is totally absent in traders and asset managers.
John E. Grable - One of the best experts on this subject based on the ideXlab platform.
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Characteristics of random responders in a financial Risk-Tolerance questionnaire
Journal of Financial Services Marketing, 2020Co-Authors: John E. Grable, Wookjae Heo, Abed RabbaniAbstract:The possibility of random response occurring, which can result in Type II errors, is possible whenever a financial Risk-Tolerance questionnaire is administered. This study was designed to apply inter-item standard deviation (ISD) scores, as introduced by Marjanovic, Holden, Struthers, Cribbie, and Greenglass (2015), to identify responders to a financial Risk-Tolerance questionnaire as hyper-consistent, conscientious, or random. Hyper-consistent responders were found to be more likely to be older married men who make their own financial and investment decisions. Those classified as hyper-consistent exhibited the lowest Risk-Tolerance scores. Conscientious responders were more likely to report having a high level of attained education and to rely on someone else when making financial and investment decisions. Financial Risk-Tolerance scores for conscientious responders fell between scores for hyper-consistent and random responders. Random responders were found to be younger, single, less well educated, and more likely to hold cash in their portfolio. Random responders also exhibited the highest financial Risk-Tolerance scores among participants in this study.
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Financial Risk Tolerance
Handbook of Consumer Finance Research, 2016Co-Authors: John E. GrableAbstract:This chapter provides an overview of the important role financial Risk Tolerance plays in shaping consumer financial decisions. A review of normative and descriptive models of Risk Tolerance is provided. Additional discussion regarding the measurement of Risk Tolerance is also presented. The chapter includes the presentation of a conceptual model of the principal factors affecting financial Risk Tolerance with recommendations designed to enhance the consumer finance field’s knowledge of Risk Tolerance. The chapter concludes with a summary of additional research needed to better understand the multidimensional nature of Risk Tolerance.
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Educational Achievement as a Mediator Between Gender and Financial Risk Tolerance
2013Co-Authors: Sam Cupples, Erika Rasure, John E. GrableAbstract:The purpose of this study involved testing whether attained education mediates the association between gender and financial Risk Tolerance. Using data from a demographically diverse sample living in the United States (N = 249), it was determined that the direct association between being female and Risk Tolerance was negative. That is, women exhibited a Risk-averse profile. Attained education was found to be positively associated with Risk Tolerance. Using a Sobel test, it was then determined that the total effect of gender on Risk Tolerance could be significantly reduced when education was used a mediator between gender and Risk Tolerance. Results were confirmed using a bootstrap estimation procedure that showed a medium to large overall effect size for the indirect effect.
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Risk Tolerance Estimation Bias: The Age Effect
Journal of Business & Economics Research (JBER), 2011Co-Authors: John E. Grable, Samantha Mcgill, Sonya L. BrittAbstract:Older individuals are generally assumed to be less Risk tolerant compared to others. The purpose of this research was to test how accurately working adults at different ages in the lifespan estimate their Risk-taking propensity. Differential predictions, using ANOVA and regression analyses, were assessed. Findings suggest that younger working adults tend to over-estimate their Risk Tolerance compared to older working adults. Although those in middle-age were shown to under-estimate their Risk Tolerance compared to the youngest working adults, the results were not significant. A discussion of findings is presented with the proposition that over- and under-estimation of Risk Tolerance might help explain the types of Risk-taking behaviors engaged in by individuals over time.
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Self-assessments of Risk Tolerance by women and men.
Psychological Reports, 2007Co-Authors: John E. Grable, Michael J. RoszkowskiAbstract:A convenience sample of 1,741 Internet users completed a 12-item financial Risk-Tolerance questionnaire. They also rated themselves on their Tolerance for financial Risk using a 4-point rating scale. The 12-item summated rating score was used to predict the self-rating. The residual between actual and predicted self-rating was compared by sex. The residual for males was positive, indicating that men tended to overestimate their proclivity for taking Risks. Conversely, the residual for females was negative, suggesting that women underestimate their Tolerance for Risk. The relationship held when controlling for other factors linked to Risk Tolerance, i.e., age, household income, marital status, and education. It was also noted that Risk Tolerance was overestimated by younger respondents and those with a graduate education.
