The Psychology of Risk: The Behavioral Finance Perspective

Ricciardi, Victor

doi:10.1002/9780470404324.hof002010

Cited by 56 publications

(46 citation statements)

References 125 publications

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“…While the notion of risk perception was initially introduced by Bauer (1960) to explain consumer risk-taking behaviours, Ricciardi (2008) clarifies that this concept is applicable to understanding financial behaviour. In the context of making investment decisions, risk perception is utilised by investors as part of a subjective judgment process when gauging the level of investment risk (Ricciardi and Rice, 2014).…”

Section: ⅱ Literature Reviewmentioning

confidence: 99%

An Investigation of Financial Investment Intention using Covariance-Based Structural Equation Modelling

Lim¹,

Mail²,

Karim³

et al. 2020

Glob Bus Financ Rev

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Decision-making process about financial investment is complicated. Relying on modern financial theory to explain behaviours of individual investors is inadequate because it focuses on the objective risk as the determinant for making investment decisions under the assumption that individuals are rational. The current study, which was built from the financial, sociological and psychological perspectives, investigated the predictors of risk perception and determined the association of risk perception and attitude toward financial investment intention. This study served the purpose of unravelling the complexity of the financial investment decision-making process among individuals. Design/methodology/approach: The research framework was based on Perception Formation Model (PFM) with further support from the Theory of Planned Behaviour, decision making models under risk, and knowledge-attitudebehaviour model. Purposive-sampling method was adopted. The dataset, which consisted a total of 492 responses from income earners below the age of prime savings years were entered for analysis. Twelve hypotheses were tested using the Analysis of Moment Structures (AMOS) statistical software. Findings: Measurement-model assessment revealed the data fitted well to the research model Results from the structural-model assessment revealed subjective knowledge, peer influence, internet influence, and risk propensity had a significant relationship with favourable risk perception. Consistent with the PFM proposition, it was found favourable risk perception significantly related to higher intention toward financial investment. Research limitations/implications: The resultant outcomes strengthen the understanding of how financial investment decision is performed by individuals, which is crucial in the personal-finance industry, especially in promoting a long-term and meaningful client-advisor relationship. Interestingly, objective knowledge, which measured the actual level of financial knowledge was found to be insignificantly associated with risk perception and intention toward financial investment. As a sizeable financial literature posited financial knowledge has impact on decision-making process, future study could perhaps examine whether objective knowledge could contextually alter the relationship between predictors and the endogenous variable. Originality/value: The study has successfully identified several predictors for risk perception about financial investment and provided an empirical link for knowledge-perception-attitude-intention, thus, enriching the behavioural finance literature. The research model was robust as it was formulated based on the three major pillars of behavioral finance, namely: financial, sociological, and psychological perspectives.

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Section: ⅱ Literature Reviewmentioning

confidence: 99%

An Investigation of Financial Investment Intention using Covariance-Based Structural Equation Modelling

Lim¹,

Mail²,

Karim³

et al. 2020

Glob Bus Financ Rev

View full text Add to dashboard Cite

show abstract

“…In contrast, Tversky and Kahneman, 1973, observed that cognitive biases are based on errors in basic statistical processing, information processing or memory processing. However, one key difference between cognitive and emotional behavioral bias is that cognitive biases can be corrected (Anderson, 2002) since they stem from faulty reasoning rather that emotional predisposition (Ricciardi, 2008).…”

Section: Introductionmentioning

confidence: 99%

The Effect of Personality Traits on Cognitive Investment Biases

2020

jcr

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The purpose of this research is to assess the impact of personality factors on an investor's financial decision-making particularly those related to cognitive biases. The understanding of behavioral biases among investors holds the key to identifying an investors' propensity to making irrational and illogical decisions. Our research examined an investors' behavioral orientation and their propensity towards cognitive biases in financial decision-making. Our research took place in two stages. In the first stage, we identified predominant cognitive biases among investors using an extensive review of existing research. We further prepared instruments to measure the cognitive biases for which we conducted exploratory factor analysis followed by confirmatory factor analysis. In the second stage, we used the 16pf instrument developed by Cattell to identify whether there exists a relationship between the personality of an investor and his propensity to have an inclination towards a particular cognitive behavioral bias and we identified some key relationships. Our research showed some interesting trends. We observed that most of the cognitive biases were related to particular personality traits namely, abstractedness, reasoning, emotional, stability, dominance and openness to change. Thus, for investment advisors and policy makers, if an investor demonstrates these personality traits, one can conclude that the investor may be more likely to have an inclination to have cognitive biases in investment decision making.

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“…Investors are normally assumed to make their financial decisions rationally according to classical economic theories but some novice investors make unsuitable investment decisions based on irrational exuberance (Ricciardi, 2008). In fact, there are always some evidences on irregularity of stock market, there are various efforts on explaining the phenomena, which often follows different logic, and it is more associated with psychological characteristics describing investors' behaviors on capital markets (Slovic, 2001;Glaser et al, 2004;Jerzmanowski & Nabar, 2008;Bosi & Seegmuller, 2010).…”

Section: Introductionmentioning

confidence: 99%

A study on investors’ personality characteristics and behavioral biases: Conservatism bias and availability bias in the Tehran Stock Exchange

Moradi¹,

Mostafaei²,

Meshki³

2013

10.5267/j.msl

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Most economic and finance theories are based on the assumption that during economic decision making, people would act totally rational and consider all available information. Nevertheless, behavioral finance focuses on studying of the role of psychological factors on economic participants' behavior. The study shows that in real-world environment, people are influenced by emotional and cognitive errors and may make irrational financial decisions. In many cases, the participants of financial markets are not aware of their talents for error in decision making, so they are dissatisfied with their investments by considering some behavioral biases decisions. These decisions may often yield undesirable outcomes, which could influence economy, significantly. This paper presents a survey on the relationship between personality dimensions with behavioral biases and availability bias among investment managers in the Tehran Stock Exchange using SPSS software, descriptive and inferential statistics. The necessary data are collected through questionnaire and they are analyzed using some statistical tests. The preliminary results indicate that there is a relationship between personality dimensions and behavioral biases like conservatism bias and availability bias among the investors in the Tehran Stock Exchange.

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The Psychology of Risk: The Behavioral Finance Perspective

Cited by 56 publications

References 125 publications

An Investigation of Financial Investment Intention using Covariance-Based Structural Equation Modelling

An Investigation of Financial Investment Intention using Covariance-Based Structural Equation Modelling

The Effect of Personality Traits on Cognitive Investment Biases

A study on investors’ personality characteristics and behavioral biases: Conservatism bias and availability bias in the Tehran Stock Exchange

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