Investor's Risk Attitude Research Articles

Risk Attitudes and Personality Traits Among Investors in Funds

How do an investor’s thoughts and feelings influence their behavior? Financial institutions must assess the risk attitudes of investors to ensure investors are being recommended appropriate financial products. This study is a further examination into whether risk attitudes are correlated with personality traits and to determine the risk attitudes of investors from different backgrounds. The risk attitudes of investors were examined according to the Big Five personality traits. Investor personality traits were linked to their investment decisions and risk attitudes. Differences in risk attitudes between investors from different backgrounds were also explored. A questionnaire survey was administered. Investors with fund investment experience were recruited. Correlations were observed between the Big Five personality traits and risk attitudes. Extroversion, agreeableness, conscientiousness, and openness to new experiences were positively correlated with risk attitudes, and neuroticism was inversely correlated with risk attitudes. These results indicated direct relationships between the Big Five personality traits and risk attitudes. This study also revealed significant differences in risk preferences between gender, marital status, discretionary budget, fund investment experience, and risk profile. The study results provide a broader reference for establishing investment risk profile charts that integrate personality traits into behavioral finance models in financial practices.

Risk‐sensitive large‐population linear‐quadratic‐Gaussian Games with major and minor agents

AbstractThis paper studies large‐population dynamic games involving a linear‐quadratic‐Gaussian (LQG) system with an exponential cost functional. The parameter in the cost functional can describe an investor's risk attitude. In the game, there are a major agent and a population of minor agents where is very large. The agents in the games are coupled via both their individual stochastic dynamics and their individual cost functions. The mean field methodology yields a set of decentralized controls, which are shown to be an ‐Nash equilibrium for a finite population system where . Numerical results are established to illustrate the impact of the population's collective behaviors and the consistency of the mean field estimation.

Influence of risk propensity, behavioural biases and demographic factors on equity investors' risk perception

PurposeInvestor risk perception is a personalized judgement on the uncertainty of returns pertaining to a financial instrument. This study identifies key psychological and demographic factors that influence risk perception. It also unravels the complex relationship between demographic attributes and investor's risk attitude towards equity investment.Design/methodology/approachExploratory factor analysis is used to identify factors that define investor risk perception. Multiple regression is used to assess the relationship between demographic traits and factor groups. Kruskal–Wallis test is used to ascertain whether the factors extracted differ across demographic categories. A risk perception framework based on these findings is developed to provide deeper insight.FindingsThere is evidence of the relationship and influence of demographic factors on risk propensity and behavioural bias. From this study, it is apparent that return expectation, time horizon and loss aversion, which define the risk propensity construct, vary significantly based on demographic traits. Familiarity, overconfidence, anchoring and experiential biases which define the behavioural bias construct differ across demographic categories. These factors influence the risk perception of an individual with respect to equity investments.Research limitations/implicationsThe reference for the framework of this study is limited as there has been no precedence of similar work in academia.Practical implicationsThis paper establishes that information seekers make rational decisions. The paper iterates the need for portfolio managers to develop and align investment strategies after evaluation of investors' risk by including these behavioural factors, this can particularly be advantageous during extreme volatility in markets that concedes the possibility of irrational decision making.Social implicationsThis study highlights that regulators need to acknowledge the investor's affective, cognitive and demographic impact on equity markets and align risk control measures that are conducive to market evolution. It also creates awareness among market participants that psychological factors and behavioural biases can have an impact on investment decisions.Originality/valueThis is the only study that looks at a three-dimensional perspective of the investor risk perception framework. The study presents the relationship between risk propensity, behavioural bias and demographic factors in the backdrop of “information” being the mediating variable. This paper covers five characteristics of risk propensity and eight behavioural biases, such a vast coverage has not been attempted within the academic realm earlier with the aforesaid perspective.

Impact of Big-five Personality Traits on Investor's Risk Attitude

The financial personality of an individual plays a crucial role in the investment decision-making process, considering the expected level of risk and return. This study investigated the impact of personality traits on the risk-taking attitude of potential investors in the Ludhiana district of Punjab, North India. Hence, the study adopted the descriptive research design with a snowball sampling technique. The study modified the big five personality traits instrument according to the need and a structured questionnaire administered to over fifty investors. Statistical techniques like descriptive statistics, KMO, and Bartlett test of Sphericity and Exploratory Factor Analysis were used to process the collected information. The findings revealed that extrovert personalities were more prone to high-risk investments, whereas conscientious investors avoid risky investments. This study also disclosed the significant relationship between personality traits and attitudes to risk. The study could be further extended to larger sample size and to other geographical areas to solicit the results effectively.

Investor Characteristics and Their Effect on Investment Decisions among Public University Workers in Kenya

Investment decision has become part of individuals’ lives in the in recent days. People invest in insurance policies, fixed deposits, shares, equities, real estate, mutual funds, and government securities among others. Universities are the peak of knowledge hence the community expects that workers in such institutions be in the frontline in making informed investment decisions. Although the university staff work in the same environment, it has not yet been established how their different investor characteristics affect their investment decisions. There is scanty information on the moderating effect of mobile borrowing on the relationship between investors’ risk attitude, demographic profile, and socio-economic status on investment decisions. This study investigated the effect of the investor characteristics on investment decision. The objectives of the study were to; assess the effect of investor risk attitude on investment decision among public university workers in Kenya, test the effect of the investor demographic profile on investment decisions among public university workers in Kenya, and determine the effect of socio-economic status on investment decision among public university workers in Kenya. Finally, the study examined the moderating effect of mobile borrowing on the effect of investor risk attitude and socio-economic status on investment decision among public university workers in Kenya. Capital Asset Pricing Model, Efficient Markets Hypothesis, Prospect Theory and Behavioural Finance Theory guided the study. The study adopted a descriptive survey research design with a target population of 2075 workers from the sampled Public Universities in Kenya. Stratified random sampling technique was employed from which a sample of 336 was used. Further, the study used primary data sources through a structured questionnaire. The questionnaires were administered using google forms. Data was analysed with the aid of SPSS version 26 software and Microsoft excel. Charts, tables, graphs, and figures were used to present the results. The results of the study indicated that risk attitude played the biggest role in investment decision-making since it explained 41.7 percent of investment decision. In addition, all the demographic factors influenced the choice of investment. The results also showed that investors in the age of 31-40 were willing to diversify their investments unlike the other age groups. Mobile borrowing was found to moderate the relationship between investment decision and its predictors. The study recommends that a similar study is conducted once the government operationalises the mobile lending control. Since workers between 31-40 years were found to have a much higher affinity for risk and investment, the government should consider targeting civil servants and other professionals in this age group by providing them with investment incentives.

Irrational risk-taking of professionals? The relationship between risk exposures and previous profits

The risk attitude of investors is a key factor determining financial asset prices and market trends. Changes in risk attitude may be due to the interference of macro-level (business cycle) and micro-level (individual experience) effects. We investigate the impact of individual experience on the subsequent risk-taking attitude of professionals via the analysis of the trading activity of 351 non-financial firms and (non-bank) financial institutions (insurance companies, financial intermediaries, etc.) covering 57,039 FX forward transactions in a highly volatile period between January 2008 and November 2012. Panel regressions for all firms and institutions do not show significant behavioral patterns. When investigating each client separately, however, we find that 39.7% of the clients having enough transactions to analyze statistically tend to increase their risk exposure irrationally after large gains or losses which can be the manifestation of the break-even and house-money effects well-documented in the literature for non-professionals. This irrational behavior may destroy value, so both market players and regulators should pay attention to monitor and control it.

Capitalizing on prospect theory value: The Asian developed stock markets

This study shows that a stock whose past return distribution has a high (low) prospect theory value earns a low (high) subsequent return in the stock markets in Hong Kong and Singapore as well as in Japan. In addition, it investigates whether appropriate components of the value function and the probability weighting function that capitalize on prospect theory value are different across countries due to the different risk attitudes of investors. The parameter estimates show that each stock market has different cumulative prospect theory parameters for better performance, and the level of loss aversion for each market is lower than the original values offered by Tversky and Kahneman (1992).

Risk measures for direct real estate investments with non-normal or unknown return distributions

The volatility of returns is probably the most widely used risk measure for real estate. This is rather surprising since a number of studies have cast doubts on the view that volatility can capture the manifold risks attached to properties and corresponds to the risk attitude of investors. A central issue in this discussion is the statistical properties of real estate returns—in contrast to neoclassical capital market theory they are mostly non-normal and often unknown, which render many statistical measures useless. Based on a literature review and an analysis of data from Germany we provide evidence that volatility alone is inappropriate for measuring the risk of direct real estate.We use a unique data sample by IPD, which includes the total returns of 939 properties across different usage types (56% office, 20% retail, 8% others and 16% residential properties) from 1996 to 2009, the German IPD Index, and the German Property Index. The analysis of the distributional characteristics shows that German real estate returns in this period were not normally distributed and that a logistic distribution would have been a better fit. This is in line with most of the current literature on this subject and leads to the question which indicators are more appropriate to measure real estate risks. We suggest that a combination of quantitative and qualitative risk measures more adequately captures real estate risks and conforms better with investor attitudes to risk. Furthermore, we present criteria for the purpose of risk classification.

Optimization Problem of Insurance Investment Based on Spectral Risk Measure and RAROC Criterion

This paper introduces spectral risk measure (SRM) into optimization problem of insurance investment. Spectral risk measure could describe the degree of risk aversion, so the underlying strategy might take the investor's risk attitude into account. We establish an optimization model aiming at maximizing risk-adjusted return of capital (RAROC) involved with spectral risk measure. The theoretical result is derived and empirical study is displayed under different risk measures and different confidence levels comparatively. The result shows that risk attitude has a significant impact on investment strategy. With the increase of risk aversion factor, the investment ratio of risk asset correspondingly reduces. When the aversive level increases to a certain extent, the impact on investment strategies disappears because of the marginal effect of risk aversion. In the case of VaR and CVaR without regard for risk aversion, the investment ratio of risk asset is increasing significantly.

Women are scaredy-cats and men are conquerors?

The European legal framework requires that financial consultants assess their clients’ risk tolerance before advising them on investments. The study aims at further testing an alternative measure to quantify the risk attitudes of investors: The Implicit Association Test (IAT). This study examines differences in implicit, unconscious, and explicit cognitive attitudes of men and women. The results of the IAT are compared with their answers from a risk tolerance questionnaire used by practitioners and self-selected asset allocation (portfolio). The data show that implicit attitude, and, thus, unconscious and uncontrolled thinking, can differ from conscious processes. Furthermore, in this study, there is no gender gap in risk attitude and risk tolerance. The findings suggest that experience and financial knowledge are likely the most important determinants of risk attitudes with no significant difference between men and women.

International asset allocation optimization with fuzzy return

This paper investigates an international asset allocation problem in a fuzzy uncertain environment, where the risk attitudes of investors are taken into consideration. Since investors are usually risk aversion, we use the possibilistic risk premium index to measure their required compensation for implementing a venture investment in the paper. Then, we present a possibilistic international asset allocation optimization model with realistic constraints. The main features of the proposed model are that we represent investors’ risk preferences by the commonly-used hyperbolic absolute risk aversion (HARA) utility function, and incorporate some realistic constraints into the proposed model to simulate the transaction in the real world financial markets. To solve the proposed model, we design a time variant differential evolution with harmony search (TVDEHS) algorithm in the paper. Finally, we provide a numerical example to demonstrate the application of the proposed model and highlight the performance of the designed algorithm.

Investigation of Variation between Risk Attitude and Investment Biases

There is a palpable link between financial investment decision making and investors’ behaviour. Research into investors’ behaviour may prove useful in increasing our understanding of the extremely complex financial marketplace. In many cases, investors are unaware of their predisposition for error. And more often, an irrational investor is a dissatisfied investor, because biases usually undermine financial goals. By adopting an experimental approach, the researchers try to correlate established investor biases with the psychographic profiles of investors, to see whether specific risk personality profiles correlate with susceptibility to four biases: herding, endowment, loss aversion and framing. Many studies have focused on exploring the demographics of investment behavioural flaws, but very little attention has been paid to the risk attitude of investors and their actual investment behaviour. The findings of this study bridge two aspects of literature, being attitude to financial risk and behavioural investment biases.

Exploring Determinants to Explain Aspects of Individual Investors’ Financial Behaviour

This study uses exploratory factor analysis and structural modelling to determine individual determinants that are likely to influence financial trading behaviour. A questionnaire was collected form 179 individual investors who traded in the United Arab Emirates. The study has determined three likely independent variables; namely, investors’ perception of information asymmetry, market perceptions and overconfidence, that may predict investor’s risk attitude. The findings are congruent with existing literature in this field, and add knowledge to the relatively new field of financial behaviour. These findings may provide valuable guidance for researchers and practitioners in understanding what may influence the risk attitude of investors and to explain possible reasons for inefficiencies of markets. Additionally, the study demonstrates the relevance of using structural modelling for understanding relationships between factors influencing financial behaviours, and in developing a behavioural framework.

Research on portfolio investment of different risk attitude with utility function

In this paper, firstly we research on portfolio investment of different risk attitude of investors with their classic utility functions, then analyse their difference and connection, at last several numerical examples are given.

Fuzzy portfolio model with different investor risk attitudes

We propose a fuzzy portfolio model designed for efficient portfolio selection with respect to uncertain or vague returns. Although many researchers have studied the fuzzy portfolio model, no researcher has yet attempted a behavioral analysis of the investor in the fuzzy portfolio model. To address this problem, we examined investor risk attitudes—risk-averse, risk-neutral, or risk-seeking behaviors—to discover an efficient method for fuzzy portfolio selection. In this study, we relied on the advantages of possibilistic mean–standard deviation models that we believed would fit the risk attitudes of investors. Thus, we developed a fuzzy portfolio model that focuses on different investor risk attitudes so that fuzzy portfolio selection for investors who possess different risk attitudes can be achieved more easily. Finally, we presented a numerical example of a portfolio selection problem to illustrate ways to address problems presented by a variety of investor risk attitudes.

ITMs versus OTMs*

By comparing liquidity and price discovery effects, the market microstructure literature insists that in-the-money options (ITMs) are informationally inferior to out-of-the-money options. However, such an argument is at odds with the anecdotal point that ITMs may be more effective for hedging future volatility risk. ITMs are driven by institutional investors, who are considered to be informed traders, and can provide significant hedging benefits such that a hedging with ITMs requires fewer options and less frequent rebalancing. To clear this suspicion, we compare implied risk-neutral densities, implied risk aversions and volatility forecasting performances. Contrary to the anecdotal evidence, our findings show the inferiority of ITMs in forecasting future volatilities, even after adjusting for the risk attitude of investors. These findings offer support for the arguments made in the extant market microstructure literature.

Evolving macroeconomic perceptions and the term structure of interest rates

We explore the role of evolving beliefs regarding the structure of the macroeconomy in improving our understanding of the term structure of interest rates within the context of a simple macro-finance model. Using quarterly vintages of real-time data and survey forecasts for the United States over the past 40 years, we show that a recursively estimated VAR on real GDP growth, inflation and the nominal short-term interest rate generates predictions that are more consistent with survey forecasts than a benchmark fixed-coefficient counterpart. We then estimate a simple term structure model under the assumption that investor risk attitude is driven by near-term expectations of the three state variables. When we allow for evolving beliefs about the macroeconomy, the resulting term structure model provides a better fit to the cross section of yields than the benchmark model, especially at longer maturities, and exhibits better performance in out-of-sample predictions of future yield movements.

Investors' Risk Attitude and Risky Behavior: A Bayesian Approach with Imperfect Information

In a choice model of risky assets the role of risk aversion is analyzed. The measure of risk preference comes from a direct subjective survey question and it is considered as an imperfect information about the true risk attitude of investors. Misclassification between the true and the observed risk aversion is explicitly taken into account in the empirical model. A Data Augmentation approach, a Bayesian procedure for incomplete-data problems, is applied on data from the 2006 Survey of Household Income and Wealth by the Bank of Italy. Results indicate that when misclassification of investors is taken into account model estimates show the good performance of the subjective question when used as a control in a portfolio choice models. Moreover risk aversion emerges as a strong predictor of the probability to hold risky assets. The analysis also shows that probability of misclassification decreases as latent risk aversion increases, that means that more risk tolerant investors tend to be classified erroneously more often than less risk tolerant investors.

Second-Order Stochastic Dominance, Reward-Risk Portfolio Selection, and the CAPM

AbstractStarting from the reward-risk model for portfolio selection introduced in De Giorgi (2005), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. In contrast to the mean-variance model, reward-risk portfolio selection arises from an axiomatic definition of reward and risk measures based on a few basic principles, including consistency with second-order stochastic dominance. With complete markets, we show that at any financial market equilibrium, reward-risk investors' optimal allocations are comonotonic and, therefore, our model reduces to a representative investor model. Moreover, the pricing kernel is an explicitly given, non-increasing function of the market portfolio return, reflecting the representative investor's risk attitude. Finally, an empirical application shows that the reward-risk CAPM captures the cross section of U.S. stock returns better than the mean-variance CAPM does.

A new class of coherent risk measures based on p-norms and their applications

To exercise better control on the lower tail of the loss distribution and to easily describe the investor's risk attitude, a new class of coherent risk measures is proposed in this paper by taking ...