Individual Financial Risk Tolerance and the Global Financial Crisis

Gerrans, Paul; Faff, Robert W.; Hartnett, Neil

doi:10.2139/ssrn.1990811

Cited by 34 publications

(33 citation statements)

References 40 publications

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“…It has been suggested in some studies that risk tolerance is time-varying, and declines following periods of economic turbulence or very poor investment returns (e.g., Grable et al, 2006;Tausch and Zumbuehl, 2016;Yao et al, 2004). Bateman et al (2011) observe a very modest moderation in risk tolerance immediately following the financial crisis period of 2008, although it did not affect the relative risk tolerance of young versus old or wealthy versus less affluent, a finding echoed in Gerrans et al (2015). However, it is also widely believed that risk tolerance is a deep-seated and stable characteristic relating to an individual's personality type, social and economic position, and psychosocial factors (Filbeck et al, 2005) that will vary very little, even over long periods (see, for example, Roszkowski and Davey, 2010).…”

Section: Data Summarymentioning

confidence: 90%

Why are older investors less willing to take financial risks?

Brooks

Sangiorgi

Hillenbrand

et al. 2018

International Review of Financial Analysis

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We investigate the link between age and tolerance of financial risks in the context of attitude to risk questionnaires completed by clients when meeting their financial advisors. Using a unique database comprising the responses to over half a million such questionnaires, we show that risk tolerance declines at an increasing, albeit slow, rate with age. We investigate the explanatory power of the ability to bear losses, declining investment horizon and retirement effects, finding that these variables have considerably greater explanatory power for the cross-section of risk aversion than age, and that they are only able to partially mediate the link between age and risk tolerance. We are unable to uncover any evidence that declining cognitive abilities among older investors are able to explain their lower willingness to take financial risks. Overall, our results are indicative of a modest age effect in risk tolerance that cannot be attributed to changes in other observable characteristics that differ between younger and older investors.

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Section: Data Summarymentioning

confidence: 90%

Why are older investors less willing to take financial risks?

Brooks

Sangiorgi

Hillenbrand

et al. 2018

International Review of Financial Analysis

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show abstract

“…What remains called for is research examining how investors exactly form and update their return expectations, risk tolerance, and risk perceptions. In particular, what are the underlying factors that trigger changes in these crucial variables (Gerrans, Faff, and Hartnett [2012], Hoffmann and Post [2014])? This question is FIGURE 1 How Investor Perceptions Drive Actual Trading and Risk-taking Behavior.…”

Section: Conceptual Framework and Conclusionmentioning

confidence: 99%

How Investor Perceptions Drive Actual Trading and Risk-Taking Behavior

Hoffmann

Post

Pennings

2015

Journal of Behavioral Finance

126

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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.

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“…Moreover, there is a relative scarcity of research employing alternative methodologies to quantitative, such as surveys and experiments (Benson et al ., ). Noteworthy exceptions are recent studies on the behavioural underpinnings of individual investor beliefs and preferences (Tourani‐Rad and Kirkby, ; Gerrans et al ., ; Harding and He, ). We add to this emerging stream of literature by conducting a field study to examine how individual investors update their beliefs (i.e.…”

Section: Introductionmentioning

confidence: 99%

How return and risk experiences shape investor beliefs and preferences

Hoffmann

Post

2015

Accounting & Finance

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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

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Individual Financial Risk Tolerance and the Global Financial Crisis

Cited by 34 publications

References 40 publications

Why are older investors less willing to take financial risks?

Why are older investors less willing to take financial risks?

How Investor Perceptions Drive Actual Trading and Risk-Taking Behavior

How return and risk experiences shape investor beliefs and preferences

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