The Effect of Personal Characteristics on Attitudes toward Risk

Abstract

This paper examines the relationship between some personal characteristics of investors and investment advisors, and the degree of risk attributed by them to various types of financial investments. Personal characteristics investigated included the investors' age, education, investment experience, degree of concern for others, and the extent to which they use financial journals. The data were collected by interviews using questionnaires based on a comprehensive mapping sentence. For statistical analysis Guttman's weak monotonicity coefficient was used and the findings were further subjected to the technique of smallest space analysis. Three dimensional diagrams have been developed to facilitate visual examination of the findings. For both groups investigated, the degree of concern for others was significantly related to the degree of risk attributed to investments. The other characteristics exhibited varying degrees of relationships for the two groups. Risk can be described as a state in which more than one outcome is possible and where a probability distribution exists over possible results (outcomes) with different utilities for the decision maker. A riskless situation exists when the probability of an outcome is 1. The greater the dispersion of possible outcomes the larger is the risk.' The literature on the risk of securities has been well developed since Markowitz's [27] wellknown portfolio theory and its subsequent extensions by Sharpe [34], Lintner, [25, 26] and others [31]. According to currently accepted risk theory, the variances in stock price movements serve as the basis for measuring relative risk in securities investments. The widely used beta is a measure of systematic risk reflecting variance of the investment rate of return relative to the overall market rate of return. However, people are likely to have different attitudes toward risk.2 That a security whose