Abstract
This study has been undertaken with the objective of deciphering the formation of risk perception amongst the investors and establishes the latent heterogeneity amongst them in terms of their beliefs, perceptions and biases. Investors differ in their risk perceptions as these relate to elements like potential loss and variability for one situation and transparency and liquidity in another one. Perceived risk is explained by many factors such as age, gender, investment experience and financial literacy but financial literacy stands out as a significant predictor of the risk appetite of an individual investor. Experts and lay people differ in their risk perception as captured through psychometric paradigms. While experts base their judgments on quantitative assessment of probability and magnitude of potential harm, the lay people make use of qualitative characteristics of the situation i.e. controllability of the risk, familiarity of the risk and emotional feelings to arrive at their risk perceptions.
Published Version
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