Financial Risk Aversion Research Articles

THE RELATIONSHIP BETWEEN AIR QUALITY AND FINANCIAL RISK AVERSION: A VIEW OF HETERO‐GENEOUS RESPONSE TO AIR POLLUTION

This paper conducts experiments on a sample of subjects from Chengdu and Wuhan, China, who are mostly unconcerned about air pollution. We provide evidence on the relationship between air quality and financial risk aversion by assessing the plausibility of two channels: affects and cognitive ability. We find that air pollution increases the financial risk aversion of subjects who are concerned about it by altering their emotional responses. However, the cognitive abilities of our subjects are not affected by air pollution, regardless of whether they are concerned about the pollution or not. Meanwhile, we show that reference dependence effect can explain why most subjects in our sample are not highly concerned about air quality. The results of our study stress the importance of beliefs about the impact of air pollution in determining the relationship between air pollution and human behavior.

Exploring the relationship between social activities and financial risk aversion in adults aged 50 + with depression caseness

BackgroundRisk aversion due to depression is common among older adults, and social participation is associated with improved mental health and a lower risk of late-life depression. However, little is known about the connection between participation in social activities and risky financial decisions among adults with depression. Thus, we aim to examine the connection between participation in social activities and taking financial risks and investing in risky financial assets (with high-return potential) in such individuals, differentiated by age and gender. The study also focuses on analyzing the percentage of investors within each social activity, their attendance frequency, and motivation.MethodsThe data was obtained from the Survey of Health, Ageing and Retirement in Europe (SHARE) database Wave 2 (2006–2010). The study included 8,769 individuals aged 50 + with depression caseness, from 15 European countries and Israel who answered the question on participation in social activities and reported financial risk-taking intentions or behaviors (investing in stocks or shares, mutual funds or managed investment accounts, and both). The study utilized Pearson chi-square, odds ratios, Z, and hierarchical logistic regression tests.ResultsThe odds for taking financial risks and investing in risky financial assets were higher for those participating in social activities compared to those who did not, on both intentional (by 173%) and behavioral (by 240–397%) levels. Such social activities (attended at least once a week, without financial motivation) have been shown to be primarily represented by educational or training courses — where 33% of participants invested in risky financial assets. The connection persisted after controlling for gender, age, marital status, children, income.ConclusionsBy overcoming the subjects’ financial risk aversion, participation in social activities may help improve mental health in individuals aged 50 + with depression caseness. This has important implications for policymakers in healthcare, who by updating healthcare policies can fund and facilitate participation in social activities. As a result, the national healthcare system may benefit from lower hospitalization-related expenses, and generate higher cash flows into the country’s economy using the population’s renewed interest in investing available funds. These results are relevant in the wake of COVID-19 that increased loneliness and depression rates.

The Complementary Nature of Financial Risk Aversion and Financial Risk Tolerance

Financial risk aversion and financial risk tolerance are sometimes considered to be ‘opposite sides of the same coin’, with the implication being that risk aversion (a term describing the unwillingness of an investor to take risks based on a probability assessment) and risk tolerance (an investor’s willingness to engage in a behavior based on their subjective evaluation of the uncertainty of the outcomes) are inversely-related substitutes. The purpose of this paper is to present an alternative way of viewing these constructs. We show that risk aversion and risk tolerance act as complementary factors in models designed to describe the degree of risk observed in household investment portfolios. A series of multivariate tests were used to determine that financial risk aversion is inversely related to portfolio risk, whereas financial risk tolerance is positively associated with portfolio risk. When used in the same model, the amount of explained variance in portfolio risk was increased compared to models where one, but not the other, measure was used. Overall, financial risk tolerance exhibited the largest model effect, although financial risk aversion was also important across the models analyzed in this study.

Financial Behavior and Debt Decision-Making: The Role of Sharia Compliance of Muslim Entrepreneurs in Pekanbaru

Debt decision-making is an alternative funding source solution for MSME entrepreneurs to meet business capital. This research aims to examine financial behavior that influences debt decision-making by moderating Sharia compliance. This research uses primary data through structured questionnaires from 200 Muslim MSMEs. The distribution of questionnaires used convenience sampling techniques. Partial Least Square Structural Equation Modeling (PLS-SEM) was used to analyze data via SmartPLS software. The research results show that, overall financial behavior does not influence debt decision-making. However, each dimension of financial behavior, namely overconfidence, herding, and risk aversion, influences debt decision-making. Apart from that, Sharia compliance and its dimensions in the form of religious knowledge and religious motivation enhance the financial behavior and debt decision-making. Therefore, the research results indicate that Sharia compliance moderates the influence of financial behavior on debt decision-making.

Financial awareness, risk aversion and portfolio choice

ABSTRACT “The financial market participation puzzle remains one of the most explored yet unanswered areas in finance. We extend the debate of portfolio choice by examining stock and derivatives market participation by focusing on two key investor traits: financial awareness and risk aversion. We use an investor survey conducted by the Securities and Exchange Board of India (SEBI), covering over 15,000 Indian investor responses. We find that risk aversion is associated with a 20% lower probability of market participation, whereas risk-averse individuals having high financial awareness are around 3.3% more likely to participate in financial markets. Furthermore, financial awareness and risk aversion are more significant in areas with higher economic freedom and lower social capital. Our findings suggest that policymakers may consider tailored financial awareness programmes based on differences in risk aversion among the investors as both these characteristics have a combined relationship with financial market participation.

Households’ Decision on Capital Market Participation: What Are the Drivers? A Multi-Factor Contribution to the Participation Puzzle

Stock market investments are in the spotlight of the household finance literature, although real-world households make other financial decisions of higher relevance. We widen the scope and include decisions related to, e.g., voluntary pension plans, whole life insurance contracts, and housing and investments in other risky assets than stocks, e.g., bonds or mutual funds. Further, we provide a methodology that goes beyond regression analysis by employing a structural equation analysis (SEA) and apply it on data from a broad and representative survey of the German Central Bank. Our SEA allows us to investigate and quantitatively estimate complex relationships and to test several hypotheses simultaneously. Our structural equation model captures about 60% of the variation in the capital market participation decision. The results show that although households' financial literacy and risk aversion are most strongly related to investments in risky assets, further factors such as wealth, voluntary pension plans and whole life insurance contracts, financial advice, and investment experience should also be considered. Financial literacy is negatively related to risk aversion, i.e., the higher the financial literacy, the lower is the risk aversion. Age and gender are directly related to capital market participation and indirectly via financial literacy and risk attitude.

INVESTOR BEHAVIOR AND RISK PERCEPTION: A GENDER PERSPECTIVE

Financial literacy is explained as the cognitive understanding of financial indicators and risk aversion, risk perception and investor behavior. Perhaps the investor behavior may vary depending on several factors such as gender, age, income level, social status, education etc. This research aims to highlight the effect of gender on financial market perception among Turkish investors. The outputs of two surveys the first for the last quarter of 2022 and the second for the first quarter of 2023, are analysed and compared. Therefore, two consecutive quarters are compared by gender for investment behaviors. This reserach observes some factors such as stress level, portfolio holding times, investment decisions and expectations regarding cryptocurrency markets. The methodology follows the Cronbach Alpha, Kolmogorov-Smirnov and ShapiroWilk Normality, and Mann-Whitney U tests respectively. The findings support gender differences in perception and investment behavior.

Financial Risk Aversion Among Older Black and White Adults.

Risk aversion has a substantial impact on decision making and is associated with key demographic characteristics. However, few studies have investigated whether risk aversion varies by race. We investigated racial differences in financial risk aversion in 684 older Black and White adults without dementia in the Minority Aging Research Study and Rush Memory and Aging Project matched for age, education, sex, and cognition using Mahalanobis distance. We also investigated whether select contextual factors (self-reported discrimination, socioeconomic status, and literacy) mediated or affective factors (trust, loneliness, and neuroticism) moderated any observed racial differences. In regression models adjusted for age, education, sex, and cognitive function, older Black adults were more risk averse than older White adults (Beta = 0.1264, standard error = 0.0227, p value ≤ .00001). None of the contextual or affective factors mediated or moderated this association. Older Black adults are more financially risk averse than older White adults. Because risk aversion may be associated with important financial and health outcomes in older age, more research is needed to investigate the reasons for this difference.

Hubris or talent? Estimating the role of overconfidence in Chinese households’ investment decisions

We document the extent to which overconfidence in one’s financial literacy (FL overconfidence) plays a role in households’ reported financial risk aversion and their actual investment behavior, using data from the China Household Finance Survey. We measure FL overconfidence by estimating the gap between people’s self-reported financial literacy and their objectively measured financial knowledge. Our results indicate that FL overconfidence is negatively associated with self-reported financial risk aversion. Additionally, FL overconfidence is positively associated with the likelihood of having a brokerage account, holding risky financial instruments (other than just stock), and a proportion of assets allocated towards risky assets. We then use machine learning methods to predict which factors are most important in determining households’ risky investment decisions. We find that overconfidence plays a significant predictive role. Our work signals that households’ risky investments may be driven by biased optimism about their own financial know-how rather than their actual knowledge. We conclude that financial literacy programs should not only teach financial concepts but also make program participants aware of their own biases.

INVESTMENT BEHAVIOUR AND RISK PERCEPTION: AN ANALYSIS FOR TURKISH MARKET

Purpose- The cognitive comprehension of financial indicators, risk aversion, risk perception, and investment behavior is defined as financial literacy. It's possible that a variety of characteristics, such as gender, age, income level, social standing, education, etc., will affect an investor's behavior. The purpose of this study is to highlight the behavior of investors in Turkish capital markets. The analysis is done on the results of two surveys, the first conducted in the fourth quarter of 2022 and the second in the first quarter of 2023. Methodology- This study's objective is to highlight investor behavior and risk perception in Turkish financial markets. In the most recent two consecutive quarters, the results of two surveys are analyzed and compared. Three sections comprise the surveys. A demographic question is asked in the first section. The second section asks questions concerning investment behavior, signs of financial stress, and confidence in regard to one's financial literacy. The final aspect contributes to the analysis of what people think of the Bitcoin market. In this study, Graphic analysis, Cronbach Alpha, Normality, and Mann-Whitney U tests are performed, respectively. First, the graphical analysis of the selected questions is made. Based on these graphs, the similarities and differences between the surveys are shown. Second, The reliability test is applied to the selected questions for the statistical modeling of the analysis. This test is determined as the Cronbach Alpha test. Third, the Normality test is applied to reveal which test to use in the next step. Two different tests are used for this analysis. These are the Kolmogorov-Smirnov and Shapiro-Wilk tests. Fourth, the Mann-Whitney U test is applied. At this stage, firstly, Mann-Whitney U and Wilcoxon W test statistics are examined. The ranks are calculated for each variable. Finally, the Mann-Whitney U test is applied, and the results are interpreted. Fifth, The results of the two surveys are compared. Findings- The findings show both similarities and differences among numerous variables. For instance, holding time is defined as the amount of time an investor holds an investment or as the time between purchasing it and selling it. Investors' risk aversion and financial literacy both influence the holding period. Riskier assets force investors to adjust their purchase or sell actions dynamically. The results show various portfolio diversification behaviours. While men prefer to start with foreign currency investments, women are more interested in making gold investments. Also, middle-aged investors invest more in cryptocurrencies and take more risks than younger investors. Conclusion- based upon the analysis, findings it may be concluded that respondents do differ in their investment preferences and risk-taking over the years. The findings show various portfolio diversification behaviors. While men prefer to invest in foreign currency, women are more interested in purchasing gold. Keywords: Investor behavior, risk perception, cryptocurrency market, Bitcoin, Mann-Whitney U test. JEL Codes: G1, G4, C4

Examining the Association Between Financial Education and Financial Risk Tolerance

An individual’s financial risk tolerance (FRT) has an important role in their financial decisions. Hence, it is a recent topic of interest. Research shows a strong relationship between financial literacy and risk aversion. Little research, however, has been done investigating the correlation between financial education and FRT. In this paper, it is proposed that financial education and FRT may be positively correlated. Since risk preferences are an innate characteristic and can also be motivated by personal and psychological attributes, the relationship between financial education and FRT may not be causal. Results obtained from analyzing data from the 2021 NFCS dataset through multivariate analysis show that financial education courses are positively correlated with reporting higher measures of financial risk tolerance for college educated individuals and for financially low literate individuals who have not attended college. These results hold even after controlling for financial literacy and a myriad of other background variables. JEL Codes: D14, G00, D81, A20

CBDC uncertainty: Financial market implications

The current state of the art in the central bank digital currency (CBDC) literature views indexes constructed from digital currency news to be fully informed about CBDC uncertainty and its impact on the financial system. We argue that the hedging behavior of participants in the currency futures market could be more informative than CBDC uncertainty news in the presence of limited risk absorption capacity in futures markets. We show that the hedging factor has a statistically significant effect on financial market risk aversion and measures of uncertainty. The hedging behavior of currency futures market participants is informative of agents' reactions to the news and central bank policies around CBDC. Our results also show that CBDC uncertainty is a significant risk transmitter in the financial system. Hence, this characteristic makes the hedging factor even more important because it can directly impact risk aversion via its moderating effects, which later influence CBDC uncertainty.

Factors influencing flood damage mitigation among micro and small businesses in Kampala, Uganda

With the trends of increasing flood risk due to climate change and rapid urbanisation in many parts of the world, property level mitigation efforts have become more relevant in flood risk management. However, the flood mitigation behaviour of business owners is an understudied aspect of risk reduction. This article employs the Protection Motivation Theory framework to identify critical factors that determine the flood damage mitigation behaviour of micro, small and medium enterprises in three neighbourhoods of Kampala, Uganda. We conducted a sample survey of micro to medium-sized business owners in two informal areas and one formal area in Kampala. Our analysis established that businesses of all sizes adopted structural measures and that micro-enterprises (0–4 employees) were more likely to implement non-structural measures than small businesses. Financial losses, risk aversion, and perceptions of flood likelihood all showed positive relationships with flood damage mitigation actions. Many businesses indicated that relocation is an inefficient and costly measure, though one that is easily self-implementable. Information-seeking behaviour and receiving flood-related information stimulated businesses to mitigate, though few businesses have regular access to helpful information regarding flood mitigation measures, especially concerning non-structural measures. These insights provide a basis for crafting business resilience-building policy and strategies considering increasing climate change-induced flash-flood risk in Kampala and other similar contexts.

Financial literacy, education and risk aversion: a survey of French students

PurposeFinancial literacy is generally seen as an important factor explaining a broader set of investment behaviors. In the context of a weak financial knowledge in France, this article focuses on the particular situation of Generation Z (individuals born after 1995) and more particularly management students likely to be involved in financial decisions in the near future.Design/methodology/approachThe analysis is based on a survey conducted in the Fall of 2019, through a questionnaire distributed to 300 students enrolled in a French business school.FindingsThe results indicate that financial knowledge is poor for students who do not follow a specialized course in finance. This research also demonstrates the importance of risk behavior, showing that risk adverse students are also those with the lowest level of financial literacy.Originality/valueThis article contributes to the academic literature by focusing on students in France. It is the first study to examine Gen Z financial literacy and its implications. It raises awareness on the importance of financial education in the education curriculum.

An empirical study on the relationship between financial literacy and emotional biases

Purpose of the study: This paper aims to establish a relationship between investors’ financial literacy and emotional biases in India. Financial literacy holds tremendous importance for making systematic financial choices and decisions. Today, with ever-rising economic unpredictability, uncertainties, governments and companies pulling out of welfare schemes such as the pension system in India and worldwide bring out the undisputed significance of financial literacy and systematic financial planning. Methodology: A total of 412 responses were obtained for the research study. The research study was carried on using Pearson’s Chi-square test, Cronbach’s alpha, and factor analysis. Findings: It was found through the research that there exists a significant relationship between financial literacy and risk aversion, overconfidence bias. Both genders were equally risk averted. Men are more overconfident than women; there is a relationship between age group and overconfidence bias. Implications: This study holds its significance in finding out the degree of biases and financial literacy of investors in India, and thus with greater accessibility of information and expanding awareness shall ameliorate financial skills, knowledge, and decisions concerning investments. Novelty/Originality of this study: The prevailing studies have studied the relationship between financial literacy and cognitive biases, portfolio selection, retirement plans; the same has not studied the relationship between financial literacy and emotional biases encompassing Affinity bias, Snakebite Effect, and Myopic Loss Aversion of Indian Investors specifically.

Financial Risk Avoidance Based on the Sensor Network and Edge Computing

In order to improve the effect of financial risk aversion, this paper studies the financial risk aversion system combined with the edge computing method of the sensor network and proposes a sensor data anomaly detection algorithm based on the offset distance. Moreover, this paper divides the sensor data into several sliding windows according to the time series, analyzes the offset between the data object and other data in the sliding window by calculating the offset distance, and uses the abnormal level to indicate the possibility of data abnormality. In addition, this paper analyzes the single-layer linear network model for the data with high abnormal level and constructs a financial risk aversion model based on the edge computing of the sensor network. The simulation test results show that the financial risk aversion model based on sensor network and edge computing proposed in this paper meets the actual needs of financial risk analysis.

The Disappointment Dilemma: The Role of Expectation Proclivity and Disappointment Aversion in Describing Financial Risk Aversion and Investing Risk-Taking Behavior

This article adds to the existing literature on financial risk aversion and risk taking by testing the possibility that a person’s degree of disappointment aversion, as an anticipatory emotion, may be an antecedent of risk-taking behavior. In this regard, the purpose of this article is to introduce two interrelated measures—the expectation-proclivity scale and the disappointment-aversion scale—and to establish the empirical association between expectation-proclivity and disappointment-aversion scale scores and financial risk aversion and financial risk taking. Results from this study show that disappointment aversion is positively associated with financial risk aversion, whereas establishing high outcome expectations is negatively related with financial risk aversion. Additionally, findings show that disappointment aversion and expectation proclivity are inversely related. Findings from this study provide support for what is termed in this article the disappointment dilemma hypothesis. Specifically, financial decision-makers who are averse to disappointment may be prone to allocating assets and investment dollars in ways that minimize or avoid disappointment in the short-run, but by doing so, may regret risk-avoiding behavior in the future.

The economic impacts of direct natural disaster exposure

We estimate the economic impacts of having your home damaged or destroyed by a natural disaster. Regressions with individual, area and time fixed-effects, indicate that experiencing a natural disaster has no impact on employment and income, but substantial impacts on financial hardship and risk aversion. Impacts are particularly large for smaller isolated disasters, which attract little government support. Conversely, impacts of residing in a disaster zone without experiencing residential destruction are small. Using a Group Fixed Effects estimator, we find predictors of financial vulnerability to destruction include age, parenthood, illness, and social support. These results can help improve the allocation of government assistance after future disasters.

Effect of financial literacy and risk aversion on the relationship between self-control and financial security of individual investors in Tehran Stock Exchange

Capital markets play an important role in the economy and naturally, the proper functioning of the capital market will play a key role in ensuring economic growth. So, if capital markets are efficient, economic development will be ensured. On the other hand, since the Iranian stock market is currently very popular among investors, it is undoubtedly important to examine the behavioral biases of individual investors. Therefore, in this study, the effect of positive self-control behavioral bias on financial security was investigated with the moderating role of financial literacy and risk aversion of individual investors. For this purpose, the statistical population consisted of individual investors, traders and brokers of Tehran Stock Exchange who are directly participating in the market. Also, the statistical sample was calculated to be 421 using Cochran’s formula. A structural equation model using PLS method was used to analyze the data. The results showed that the self-control variable has a significant positive effect on risk aversion and financial security. Also, by using the financial literacy variable as a moderating variable, the intensity of the relationship between self-control and financial security of individual investors increases; that is, the financial literacy of individual stock market investors intensifies the positive relationship between self-control and security of their financial behavior. In addition, by using risk aversion as moderating variable, the intensity of the relationship between self-control and financial security of individual investors is reduced. This means that the risk aversion of individual stock market investors reduces the positive relationship between self-control and the security of their financial behavior.

Beyond Flood Preparedness: Effects of Experience, Trust, and Perceived Risk on Preparation Intentions and Financial Risk-Taking in China

Flooding, already the most damaging type of natural disaster in China, is expected to become increasingly costly around the world. However, few studies have examined residents’ flood-preparedness intentions and the effect of flood experience and other variables on general financial risk-taking. This study explored the effects of Chinese residents’ previous flood experiences, trust in public flood protection, and flood-risk perception on flood-preparedness intentions and attitudes towards financial risk-taking in general. Study 1 surveyed residents in a flooded area (n = 241) and a non-flooded area (n = 248); Study 2 surveyed a non-flooded area (n = 1599). The relations between the variables were tested through structural-equation modelling (SEM). Overall, the two studies found that residents’ flood experiences, trust in public protection, and flood-risk perception not only predicted their flood preparedness but also their financial risk aversion. This study highlights the importance of residents’ trust in public flood protection for flood risk management and communication, especially for those who have not yet experienced flooding.