Abstract
This study investigates which of four paradigms best portrays the risk profile manifest by investors in their financial asset investment decisions. The paradigms used to explain this profile were: prospect theory, investor profile analysis (IPA), the Big Five Personality Test, and the Cognitive Reflection Test (CRT). The choice of proxy for the risk preferences (profile) of a typical investor was defined by simulating investments in a laboratory setting. The results are analyzed using ordered logistic regression and show that people who have greater risk tolerance according to IPA, who violate prospect theory, and who have a high degree of openness to experience have the greatest probability of taking higher levels of risk in their investment decisions. With regard to the CRT, higher numbers of correct responses in this test has an inverse relationship with risk taking.
Highlights
Modern financial theory is based on the concept of homo economicus, adopted from neoclassical economics
With relation to personality traits, the findings revealed that the participants predominantly had “High” scores for personality characteristics in all dimensions and the characteristics possessed by the greatest numbers of participants were openness to experience (85%) and conscientiousness (74%)
In relation to the third hypothesis, it was identified that individuals effectively violate the theory of expected utility in their investment decisions incurring cognitive biases as claimed by behavioral finance [4]. This result corroborates [9] and [30], as well as the confirmation of the forth hypothesis, by pointing out the need to incorporate the analysis of behavioral bias into questionnaires that assess the risk profile of investors, enabling results that are more consistent with reality
Summary
Modern financial theory is based on the concept of homo economicus, adopted from neoclassical economics This ideal, self-interested, and perfectly rational agent maximizes his utility by choosing at each point in time the best options available. The agent of behavioral finance is not perfectly rational, but a normal human who acts and takes decisions under the influence of emotions and cognitive errors [3]. The confirmation of such evidence emerged from [4], from which interdisciplinary elements (in particular from psychology) began to be incorporated into behavioral theories of finance, in attempts to understand the process of decision-making under risk
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