Investment risk perceptions

Abstract

This paper presents the results of a detailed comparison of the perceptions by individual consumers and expert financial advisers of the investment risk involved in various UK personal financial services' products. Factor similarity tests show that there are significant differences between expert and lay investors in the way financial risks are perceived. Financial experts are likely to be less loss averse than lay investors, but are prone to affiliation bias (trusting providers and salesmen more than lay investors do), believe that the products are less complex, and are less cynical and distrustful about the protection provided by the regulators. The traditional response to the finding that experts and non‐experts have different perceptions and understandings about risk is to institute risk communication programmes designed to re‐educate consumers. However, this approach is unlikely to be successful in an environment where individual consumers distrust regulators and other experts.