The importance of staying positive: The impact of emotions on attitude to risk

Abstract

In this article, we examine the impact of emotions towards financial investments and emotions towards life in general on attitudes to financial risk using questionnaire data from 970 UK‐based retail investors. We show that risk tolerance monotonically increases with positive emotions towards investments and life, and decreases with negative emotions. We incorporate a broader range of relevant emotions than in comparable existing studies, and we show, perhaps surprisingly, that positive emotions have a more substantial impact on risk tolerance than negative emotions. We find that emotions towards investments have a considerably greater explanatory power for the cross‐section of risk aversion than gender, age, income, investment experience and investment knowledge. Our research sheds light on the different impacts that integral and background emotions have on retail investor financial decision‐making. We suggest several implications for regulators and financial advisors, and we emphasize the importance for financial educators to support investors in developing emotional resilience.

Beyond the Big Five: How Dynamic Personality Traits Predict Financial Risk Tolerance?

“…The independent variables of the study included positive and negative emotions (EMO), financial selfefficacy (FSE), resilience (RSE), trait anger (ANG), and intolerance of uncertainty (INTOL), whereas the dependent variable was represented by the financial risk tolerance (FRT) of an investor . Beyond the Big Five: How Dynamic Personality Traits Predict… EMO were found to have significant impact on an investor's FRT (Brooks et al, 2022;Forgas, 1995;Forgas et al, 1987;Johnson et al, 1983). The findings of this study are in accordance with the appraisal tendency framework (Lerner et al ., 2001) and emotional valence theory (Breaban et al, 2018), which shows that financial risk tolerance tends to increase monotonically with the positive emotions and to decrease with negative emotions towards investments .…”

Cleansing Investor’s Conscience: The Effects of Incidental Guilt on Socially Responsible Investment Decisions

“…The sort of mood of the client before or during the meeting with the financial advisor could influence the investment choices. Indeed the completion of a risk profiling questionnaire usually takes place at the very beginning of the session, when incidental emotional states are likely to play a role in the responses provided by the client (Brooks et al, 2023).…”

“…Moreover, the emotional state assessment might not be adequately performed by financial advisors who are not professionally trained in the emotional profiling of retail investors, leading to additional risks and costs related to the advisory process. Training on emotion regulation could also be beneficial for investors (Brooks et al, 2023). Indeed, individuals that cognitively rationalise emotions tend to be better decision-makers than those that just suppress them (Heilman et al, 2010), leading to more rational investment decisions.…”

“…The difference is equal to 0.17 and is significant on the 10% level. It has been documented in the literature that risk tolerance increases when positive emotions are triggered while decreasing when negative emotions are present (Brooks et al, 2023). This marginal difference in risk tolerance could potentially explain the weakly significant difference between the two sub-samples, because the risk tolerance task is presented to participants after the guilt induction, implying that guilty investors might take less risk as a byproduct of the manipulation.…”

“…See for instanceBrooks et al (2023), and the literature therein, for a discussion of the stronger impact of integral emotions versus incidental emotions on financial decision making and risk tolerance.…”