No abstract

Recent work in behavioral finance showed how investors' perceptions (i.e., return expectations, risk tolerance, and risk perception) affect hypothetical trading and risk-taking behavior. However, are such perceptions also capable of explaining actual trading and risktaking behavior? To answer this question, we combine monthly survey data with matching brokerage records to construct a panel dataset allowing us to simultaneously examine investor perceptions and behavior. We find that investor perceptions and changes therein are important drivers of actual trading and risk-taking behavior: Investors with higher levels of and upward revisions of return expectations are more likely to trade, have higher turnover, trade larger amounts per transaction, and use derivatives. Investors with higher levels of and upward revisions in risk tolerance are more likely to trade, have higher buy-sell ratios, use limit orders more frequently, and hold riskier portfolios. Investors with higher levels of risk perception are more likely to trade, have higher turnover, have lower buy-sell ratios, and hold riskier portfolios.

negatively impact risk perceptions. Realized risk, however, has no effect. That is, even in a highly volatile stockmarket period in which risk appears very salient, investors do not take it into account when updating their beliefs and preferences. This research would not have been possible without the help of a large brokerage firm. The authors thank this broker for making available its data and its employees for answering numerous questions. The authors thank the editor, Tom Smith, the deputy editor, Gary Monroe, and two anonymous reviewers for their constructive guidance through the review process. For their comments on earlier drafts of this paper and helpful discussions, the authors thank Brad Barber, Jaap Bos, Jingjing Chai, John Chalmers, Prachi Deuskar, Simon Gervais, David Hirshleifer, Cars Hommes, Matti Keloharju, Marc Kramer, Christoph Merkle, Elias Rantapuska, Paul Smeets, Stefan Straetmans, Richard Taffler, Cesira Urzi, Mei Wang, and seminar and conference participants at the University of New South Wales, Maastricht University, the University of Amsterdam, the University of Münster, the Goethe-University Frankfurt, the Colloquium on negatively impact risk perceptions. Realized risk, however, has no effect. That is, even in a highly volatile stockmarket period in which risk appears very salient, investors do not take it into account when updating their beliefs and preferences.3