Beware the inexperienced financial advisor with a high trait emotional intelligence: Psychological determinants of the misperception of the risk-return relationship

Abstract

According to financial theories, on the long run, taking risk should reward investors with higher returns. However, most investors perceive this relationship as negative. In this study, we showed that even professional financial advisors misperceived the risk-returns relationship, and we investigated the psychological determinants of this misperception in professionals. Specifically, we assessed the role of feelings towards the financial market, trait emotional intelligence (EI), and trading experience. Our results showed that financial advisors with high (vs. low) trait EI were more impacted by their feelings when estimating expected returns. Specifically, inexperienced advisors with high (vs. low) trait EI are more likely to expect a negative relationship between risks and returns. Our findings shed light on the need to educate professionals on their reliance on emotions in financial judgments.