Higher Risk Tolerance Research Articles

Taking control: Active investment choice in Singapore’s national defined contribution scheme

Abstract This paper examines what factors drive non-default investment choice among more than 7000 older plan participants in the Singaporean Central Provident Fund (CPF), and assesses the extent to which financial knowledge, experience, and attitudes help predict such choice. We find that only 16% of plan participants aged 50 and above in our sample in 2016 invest a portion of their pension savings outside of the default government-run CPF fund. Plan participants who are male, younger, not married, currently working for pay, have higher risk tolerance, and higher net worth are more likely to choose to actively manage their pension savings. Education is a strong independent determinant of active investment choice, but its effect diminishes with age. Longer-term financial planning horizon and experience in managing household finances, as well as in stocks investment, are also significantly associated with higher self-invested balances. Financial literacy is, however, not significantly associated with non-default decision-making in our sample. Our findings have important implications for policy makers seeking to encourage greater individual responsibility in pension savings and investments within defined-contribution retirement systems.

Many-player games of optimal consumption and investment under relative performance criteria

We study a portfolio optimization problem for competitive agents with CRRA utilities and a common finite time horizon. The utility of an agent depends not only on her absolute wealth and consumption but also on her relative wealth and consumption when compared to the averages among the other agents. We derive a closed form solution for the n-player game and the corresponding mean field game. This solution is unique in the class of equilibria with constant investment and continuous time-dependent consumption, both independent of the wealth of the agent. Compared to the classical Merton problem with one agent, the competitive model exhibits a wide range of highly nonlinear and non-monotone dependence on the agents’ risk tolerance and competitiveness parameters. Counter-intuitively, competitive agents with high risk tolerance may behave like non-competitive agents with low risk tolerance.

Who Are Robo-Advisor Users?

The purpose of this study is to explore the demand for robo-advising services by analyzing the participants’ behavioral characteristics and investment patterns. With the 2015 Financial Industry Regulatory Authority Investor data, we found that robo-advisor users were younger investors with high risk tolerance, whose self-assessment of financial knowledge is comparatively higher than their actual knowledge, and were independent decision-makers. By controlling for those behavioral attributes of robo-advisor users, we also found that robo-advisor users were reluctant to invest in individual stocks, while they showed the largest preference for investing in pooled investment products such as Exchange Traded Funds. Implications of this study’s findings can be beneficial to financial planning practitioners, academics, and regulators.

Mitigating climate change: A role for regulations and risk‐taking

AbstractWhy do some firms engage in actions to reduce climate change? We propose two counterintuitive mechanisms: high levels of regulation and a firm's increased tolerance for risk. Drawing from insights on how institutional contexts constrain, and enable, prosocial firm behavior, we argue that external pressures, amplified internally by a firm's higher tolerance for risk, increase the likelihood that a greenhouse gas (GHG)‐intensive firm will engage in climate change actions that exceed regulatory requirements. An analysis based on 7,101 observations of U.S. publicly traded firms during the 2013 to 2015 period supports our hypotheses. Our models show high overall prediction accuracy (88.6%) using an out‐of‐time holdout sample from 2016. Moreover, we find that firms that have exhibited environmental wrongdoing are also more likely to engage in beyond‐compliance activities, which may be a form of greenwashing. Thus, more formal and informal regulatory oversight has the potential to spur positive environmental actions. This has implications for a firm's corporate social responsibility actions as well as for climate change regulatory policy.

Know when to fold ‘em: An empirical description of risk management in public research funding

Public research funding programs typically make grants with minimal intervention by program staff, rather than using a hands-on approach to project management, which is more common in the private sector. In contrast, program staff at the US Department of Energy's Advanced Research Projects Agency – Energy (ARPA-E) are given a set of real options with which to manage funded projects: abandon, contract or expand project budgets or timelines. Using internal data from ARPA-E, we show that active project management enables risk mitigation across a portfolio of research projects. We find that program staff modify projects frequently, especially project timelines, and these changes are more sensitive to poor performance than to strong performance. We also find that projects with a shortened timeline or reduced budget are less likely to generate short-term research outputs, compared to those of ultimately similar size. This evidence suggests that the practice of active project management, when combined with high upfront risk tolerance, can be used to enhance the productivity of mission-oriented public research funding.

Know When to Fold ‘Em: An Empirical Description of Risk Management in Public Research Funding

Public research funding programs typically make grants with minimal intervention by program staff, rather than using a hands-on approach to project management, which is more common in the private sector. In contrast, program staff at the US Department of Energy’s Advanced Research Projects Agency – Energy (ARPA-E) are given a set of real options with which to manage funded projects: abandon, contract or expand project budgets or timelines. Using internal data from ARPA-E, we show that active project management enables risk mitigation across a portfolio of research projects. We find that program staff modify projects frequently, especially project timelines, and these changes are more sensitive to poor performance than to strong performance. We also find that projects with a shortened timeline or reduced budget are less likely to generate short-term research outputs, compared to those of ultimately similar size. This evidence suggests that the practice of active project management, when combined with high upfront risk tolerance, can be used to enhance the productivity of mission-oriented public research funding.

Commitment to Rebellion: Evidence from Syria

What sustains commitment to rebel fighting during civil war? Using original survey data from the ongoing conflict in Syria, we examine whether self-ascribed rebel fighters, former fighters, civilians, and refugees can be clearly differentiated based on commitment to rebellion. We ask whether such groups are better characterized as a broadly holistic fighting community or a heterogeneous mix of actors with different levels of support for violence. Using a well-balanced sample of over 300 active and former rebel fighters, civilians from within the conflict zone, and externally displaced refugees, we observe that fighting commitment is greater among active combatants compared to other cohorts. To understand why, we examine underexplored psychological mechanisms and find that individuals with higher risk tolerance, optimism bias, and identity fusion with rebel forces display greater dedication to fighting. We discuss the implications of our results for understanding who participates in civil war violence and why.

Taking Control: Active Investment Choice in Singapore’s National Defined Contribution Scheme

This paper examines what factors drive active investment choice among more than 7,000 older plan participants in the Singaporean Central Provident Fund (CPF), and assesses the extent to which financial knowledge, experience, and attitudes help predict such choice. We find that only 16% of plan participants aged 50 and above in our sample in 2016 invest a portion of their pension savings outside of the default government-run CPF fund. Plan participants who are male, younger, not married, currently working for pay, have higher risk tolerance, and higher net worth are more likely to choose to actively manage their pension savings. Education is a strong independent determinant of active investment choice, but its effect diminishes with age. Longer-term financial planning horizon and experience in managing household finances, as well as in stocks investment, are also significantly associated with higher self-invested balances. Financial literacy score is, however, not significantly associated with non-default decision-making in our sample. Our findings have important implications for policy makers seeking to encourage greater individual responsibility in pension savings and investments within defined-contribution retirement systems.

Financial Advice, Wealth and Gender: Risk Tolerance, Knowledge and Confidence

We examine how gender differences in investment risk tolerance, knowledge, confidence and portfolio cash allocations relate to the gender mix of investors and financial advisors among a sample of wealthy individuals in the UK. Our results demonstrate that gender effects are more nuanced than previously assumed. First, while even wealthy women consider themselves more conservative and allocate a higher proportion of their investable assets to cash than men, previous findings of lower investment knowledge and confidence do not extend to our sample. Second, having an advisor matters. Advised investors perceive themselves to have a higher risk tolerance and invest 10.6%-points more than self-directed investors. Finally, the investor-advisor gender combination matters, but only for female investors. Women with male advisors are more risk averse, feel less knowledgeable and less confident about their investment decisions. They also invest 11%-points less than women with female advisors. Indeed, female investors advised by women report the highest risk tolerance and make the lowest portfolio allocation to risk-free assets across the full sample, including men.

After Paying Ultra-High Net Worth Wealth Taxes, How Much Would Billionaires Have Left to Live on?

Part I: Billionaire Taxes, https://ssrn.com/abstract=3326615. Part II: Taxes Spending and Innovation, https://ssrn.com/abstract=3335386. How much can a passive investor with a high-risk tolerance earn on his or her capital? If history since the end of World War 2 is any guide, between 11 and 14 percent per year before taxes and inflation. After inflation, this comes to around 7 to 10 percent. With good tax planning, the rate of return net of income taxes, inflation, and fees could average around 6.5 to 9.5 percent per year. A family with $100,000,000 ($100 million) in wealth would pay an additional $1 million in taxes per year under Senator Elizabeth Warren’s ultra-high-net-worth tax proposal. That would reduce their after-tax disposable income to $5.5 million to $8.5 million per year. To put this into context, according to the Survey of Consumer Expenditures, households in the top 10 percent of income earned an average of $189,000 after taxes and spent on average $143,000 in 2017. Even after paying Warren’s wealth tax, a household with $100 million in assets could spend 38 to 59 times as much as a relatively high-income household. A household with a $100 million net-worth that lived modestly and spent only as much as the average household in the top 10 percent of income could reinvest $5.36 million to $8.36 million per year, growing their net-worth by 5.36% to 8.36% per year, on average. This is $5.32 million to $8.32 million more in annual savings than the average top-10 percent household. The analysis above implies that Warren’s proposed 2% to 3% ultra-high net-worth wealth tax would only slightly slow the increase in high-end wealth inequality but would not halt or reverse it. At a 5.36% return after taxes, inflation, and personal consumption, a fortune would quadruple in value every 27 years, and would therefore not be dissipated by typical family growth rates. (At 8.36%, it would quadruple in value every 18 years). Under Warren’s proposal, a household with $1 billion in wealth would pay an additional $19 million in taxes per year. After paying the wealth tax, other taxes, and reinvesting to stay ahead of inflation, our billionaire family would be still be able to spend approximately $46 million to $76 million per year, forever, without anyone in the family having to work a job. Every extra billion in wealth (above $1 billion) would translate into an additional $35 million to $65 million in disposable income per year, after taxes and fees and reinvesting to stay ahead of inflation. If policy makers wanted to cap personal wealth from purely passive investing at $1 billion, but did not want to tax the first $50 million in wealth, they would have to annually tax wealth above $50 million at around 12%. Assuming effective enforcement, this would potentially generate somewhere in the vicinity of $1 trillion in revenue per year. This is about enough to replace most payroll tax revenue and thereby give every worker in the country a double digit percentage pay raise on their first $130,000 in earnings, or give every employer equivalent savings on labor costs. A wealth tax of 5% to 10% per year would be similar to hurdle rates that are used to handicap hedge fund and private equity managers’ incentive compensation, rewarding wealth managers only when they produce returns that exceed what they should be able to accomplish with minimal skill and little effort. A similar ultra-high net-worth wealth tax rate might help distinguish persistently talented investors, leaders, or entrepreneurs from those whose growing wealth is the result of past success and good luck. In contrast to such starkly meritocratic policies, Warren’s relatively modest 2% above $50 million and 3% above $1 billion wealth tax would preserve the freedom and security that come with family wealth by making available to passively invested ultra-wealthy households millions or tens of millions of dollars every year.

Entry mode choice in emerging markets: is there any difference between emerging and developed country multinationals

Previous research has documented that, when investing abroad, emerging market multinationals (EMMs) have a higher tolerance for risk than developed country multinationals (DCMs), highlighting their propensity to make bold acquisitions and to form alliance networks. In this paper we examine the differences between EMMs and DCMs when it comes to choosing between these options of external growth. We argue that EMMs have a higher propensity than DCMs to choose joint ownership options and, among them, those involving complex partnerships, so as to leverage their routines and imprinted capabilities to deal with partners. In order to carry out the study, we consider the differences in entry mode patterns in emerging markets by multinationals from USA, European Union, BRIC, and Next-Eleven countries between 1996 and 2012. Our results supported our hypotheses.

Perceived risk, safety climate and safety behavior on Moroccan construction sites

In Morocco, the construction sector is very dynamic economically, but suffers from weak safety performance. The few available statistics about the rates of occupational injuries and fatalities point to an alarming situation. However, root causes are yet to be identified. To fill this gap in knowledge, we conducted this study using an exploratory approach. Literature review, onsite observations and a survey were conducted to gather information about safety and risk aspects on construction sites. We conducted a series of correlation tests and a regression analysis using IBM SPSS version 20. The results showed that: (a) there is a relatively strong risk perception bias among workers, with an underestimation of risk severity and occurrence probability; (b) risk perception was not found to predict safety behavior; (c) a positive safety climate seems to neutralize the negative impact that high risk tolerance had on safety behavior.

Black-White Differences in Financial Risk Tolerance

Given the increasingly diverse world, financial service providers must be aware of a variety of consumers’ needs. This study investigated differences in financial risk tolerance between households with white and black respondents. Financial literacy was positively associated with high and some (versus no) financial risk tolerance for white households, but this relationship was not found for black households. The relationship between net worth and high financial risk tolerance differed significantly for black and white households. The current findings show that the frameworks used to explain the financial behaviors of white households may not be appropriate for all groups.

Effective Risk Aversion in Thin Risk-Sharing Markets

We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We argue that traders relatively more exposed to market risk tend to submit more elastic demand functions. Noncompetitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with an extensive analysis of two-trader transactions. Even though strategic behaviour causes inefficient social allocations, traders with sufficiently high risk tolerance and/or large initial exposure to market risk obtain more utility gain in the noncompetitive equilibrium, when compared to the competitive one.

Family firms taking surprising risks: building success on conservative values

PurposeThis paper aims to explore hidden wellsprings of risk-taking in family firms.Design/methodology/approachThe high tolerance for risk shown repeatedly by the famous family firm Hipp of Germany is documented. Three major risk-taking episodes at Hipp are examined.FindingsCounterintuitively, conservative values were actually a major facilitator of risk-taking at Hipp.Research limitations/implicationsThe ramifications for other family firms, especially in Germany’s so-called Mittelstand, are examined. An open question is whether the relevant scope of the foregoing analysis may be confined to national contexts like German Mittelstand with its highly developed sector of family firms.Practical implicationsContrary to received wisdom, family firms with conservative values may actually have certain advantages in their capacity not only to assume certain types of risks but also to mitigate such risks. Especially the communitarian embeddedness of such values may provide a layer of risk mitigation.Social implicationsAt least in some countries, such as Germany, family firms are indeed willing to engage in substantial risk-taking. With their approach of combining conservative values and risk-taking, they contribute to considerable wealth and societal development.Originality/valueConservatism in management and risk-taking propensity are usually thought of as antipodes. However, it is necessary to distinguish between conservatism (which usually equates to risk aversion) and conservative values (which, as shown, may be highly compatible with a willingness to engage and succeed in risky undertakings).

Debt Holding, Financial Behavior, and Financial Satisfaction

This study examined factors associated with financial satisfaction and found that financial behaviors/attitudes provide the strongest explanation for the total variance in financial satisfaction. While overspending had a strong negative association with financial satisfaction, having a higher risk tolerance, no difficulty with monthly bill payments, and savings in an emergency fund, were all positively associated with financial satisfaction. Households with student loan debts and homeowners with mortgage loans were also less likely to be satisfied with their overall financial situation. The findings underscore the important role of positive savings and spending behavior on overall financial satisfaction and the opportunity for financial counselors, educators, and coaches to focus on motivating clients to save and plan ahead.

Impact of Risk Tolerance and Demographic Factors on Financial Investment Decision

Risk tolerance is popularly used in the personal financial planning industry to understand an investor’s attitude towards risk. In the twenty-first century, it is very important for the various investment firms, fund managers, financial planners to understand financial investment decisions of an investor for developing a strategy for the sale of their investment products in market. However, financial decisions of an individual not only depend on financial risk-tolerance level, but also upon different demographic factors. Thus, this study is undertaken to develop a model that helps in understanding impact of risk tolerance and demographic factors jointly on investment decision, especially, a decision related to level of investment. Also, investor may be having higher risk tolerance for the calculative investment but may be having lover risk tolerance in speculative investment. So, based on extensive literature support, this research has tried to propose a model for understanding the impact of investment risk tolerance, capital risk tolerance, speculative risk tolerance, and six important demographic variables jointly on investment decision. Thus, this study would be helpful to investment firms in understanding impact of risk tolerances and demographic variables jointly on level of investment of investors, which can be used for designing a strategy or investment product to offer to the investors with different levels of financial risk tolerance and different demographic profiles.

Who starts a self-managed superannuation fund and why?

Self-managed superannuation funds (SMSFs) – small retirement savings funds with four or fewer members – now manage almost one-third of retirement savings in Australia, and serve over 1 million members. The number of SMSFs has increased to more than half a million in two decades, yet little is known about the reasons people start the funds and how they operate. We use a survey of more than 500 SMSF members and 500 large superannuation fund members to analyse why SMSF members commence and manage their own fund, compared to similar people who stay with a large fund. We find that control over investments and tax minimisation are the most common reasons for starting a SMSF, while satisfaction with large funds and unwillingness to take on the administrative burden of self-management are the most common reasons for not doing so. SMSF members do not show any greater financial skills than non-members, but they do display overconfidence, a higher risk tolerance and a more trusting attitude to financial professionals. Model results show that the majority of SMSF members start their funds at the suggestion of financial professionals. We also show that those who say they are thinking about starting a SMSF are different in significant ways from the eventual SMSF members, further evidence of the influence of the advice industry.

Speak out your risk: Dialectal effects on merger decisions

The “biological code” of a language can be measured by tone patterns and pitch heights, which are recognized to foster and promote certain personal traits like self-confidence and risk tolerance. Guided by linguistic and financial research, this study examines the impact of Chinese dialects on CEOs' merger decisions. We hypothesize that CEOs in China who speak different dialects may have different tendencies to engage in risky activities, like mergers and acquisitions (M&As). Results suggest that CEOs who speak dialects with fewer rising tones and higher pitch are more likely to undertake M&As, while CEOs who speak dialects with more rising tones and lower pitch are less likely to undertake M&As. The results are robust to various specifications, including the impact of local economic and regional cultural factors. Additionally, firms' performances after M&As are evaluated. The results suggest that CEOs' overconfidence and high-risk tolerance are likely to cause M&As to be less successful in the long run.

Amygdala Functional and Structural Connectivity Predicts Individual Risk Tolerance

Risk tolerance, the degree to which an individual is willing to tolerate risk in order to achieve a greater expected return, influences a variety of financial choices and health behaviors. Here we identify intrinsic neural markers for risk tolerance in a large (n= 108) multimodal imaging dataset of healthy young adults, which includes anatomical and resting-state functional MRI and diffusion tensor imaging. Using a data-driven approach, we found that higher risk tolerance was most strongly associated with greater global functional connectivity (node strength) of and greater gray matter volume in bilateral amygdala. Further, risk tolerance was positively associated with functional connectivity between amygdala and medial prefrontal cortex and negatively associated with structural connectivity between these regions. These findings show how the intrinsic functional and structural architecture of the amygdala, and amygdala-medial prefrontal pathways, which have previously been implicated in anxiety, are linked to individual differences in risk tolerance during economic decision making.