Individual investors' risk judgments and investment decisions: The impact of accounting and market data

Abstract

This study experimentally investigates whether risk judgments and investment decisions of individual investors are affected by the variables noted in portfolio theory (i.e. variance of returns and covariance of returns with the market return) and/or accounting risk measures. Results indicate that investors are able to assess and do (not) use return variance (covariance) as described in portfolio theory. When accounting and market measures are in conflict, the participants' risk judgments correspond with accounting measures rather than market measures.