The Changing Risk Preferences of High-Net-Worth Individual Investors During the Global Financial Crisis

Abstract

This paper studies how high-net-worth individual (HNWI) investors changed their risk preferences during the Global Financial Crisis (from 2007 to 2009) and how their asset allocation evolved in the same period. We had access to a confidential database from a Swiss international private bank with two samples of risk preferences questionnaires (suitability tests) filled by the same HNWI investors in 2007 and 2009. We compared the suitability tests’ suggested investment profiles to those investors’ real asset allocations at the same moments in time. We estimated correlation coefficients and ran hypothesis tests to examine if the changes in risk preferences during the period were statistically significant. Findings: HNWI investors’ risk preferences changed during the period, but the gap between their self-assessed risk preference and their real asset allocation narrowed, suggesting that they have a convex value function curve. We found evidence consistent with the psychological risk-as-feelings model, as lower risk-exposed HNWI investors also tended to decrease their risk preference level during a crisis. The evidence also suggests a stronger preference for cash during the crisis period, confirming the results of studies that have focused on the importance of liquidity during external shocks.

The Influence of Gender on Individuals’ Ability to Predict Their Own Risk Tolerance: Evidence from a European Country

“…Individuals' educational levels are another demographic factor that appears to explain risk tolerance levels, as it is plausible to consider that individuals with more comprehensive academic backgrounds are better equipped to adopt riskier financial behaviors (e.g., Sjoberg 2000;Larkin et al 2013). Beyond sociodemographic factors, other determinants of risk tolerance have been identified, such as the national culture, in which decision-makers operate (e.g., Pyles et al 2016;Illiashenko 2019), and experiences in adverse macroeconomic conditions, especially those marked by financial crises (e.g., Malmendier and Nagel 2011;Sahm 2012;Cunha and Lobão 2022).…”

“…Another possible limitation is that the perceived level of risk tolerance by individuals is probably not a static variable, as it may vary over time and in reaction to historically significant events. For instance, Sahm (2012) and Cunha and Lobão (2022) showed that macroeconomic conditions and the occurrence of financial crises have a significant impact on the risk tolerance levels of economic agents.…”