Focusing on volatility information instead of portfolio weights as an aid to investor decisions

Ehm, Christian; Laudenbach, Christine; Weber, Martin

doi:10.1007/s10683-017-9537-0

Cited by 3 publications

(1 citation statement)

References 37 publications

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“…Nosi ć and Weber (2010) , Weber et al (2013) , Bradbury et al (2015) and Merkle (2018) demonstrate that volatility often plays only a minor role for risk perception and allocation decisions. 1 In papers using a similar design to our own, 1 Ehm et al (2018) outline possibilities to at least partially overcome the neglect of volatility in investment decisions. Earlier studies on investor risk perception include MacGregor et al (1999) , who ask financial experts to rate the riskiness https://doi.org/10.1016/j.jbankfin.2019.105635 0378-4266/© 2019 The Authors.…”

Section: Introductionmentioning

confidence: 99%

Does Investor Risk Perception Drive Asset Prices in Markets? Experimental Evidence

2017

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We explore how individual risk perception influences prices and trading behavior in a market setting. Specifically, our study lets experimental participants trade assets characterized by varying shapes of return distributions. While common mean-variance models predict identical prices for most of our assets, we find trading prices to differ significantly. Assets that are perceived as being less risky on average (despite having identical volatility) trade at significantly higher prices. Individually, traders who perceive a certain asset to be less risky are also net buyers on average. With regard to different risk measures, our results show that the probability of a loss is the strongest predictor of transaction prices and risk perception. All these results hold also for experienced traders and when traders can trade two assets at the same time.

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