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On The Linkage Between Financial Risk Tolerance And Risk Aversion

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  • Robert Faff
  • Daniel Mulino
  • Daniel Chai

Abstract

We explore the linkage between financial risk tolerance (FRT) and risk aversion. To do this, we obtain FRT scores from a psychometrically validated survey and conduct a battery of online lottery choice experiments involving the same nonstudent participants. We contrast: real and hypothetical payoffs, low and high stakes, decisions involving gains and losses, and order effects. Our key finding is that the two approaches to analyzing decision making under uncertainty are strongly aligned. We present evidence that this is particularly the case for the female participants in our sample and when high-stake gambles are employed. 2008 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Robert Faff & Daniel Mulino & Daniel Chai, 2008. "On The Linkage Between Financial Risk Tolerance And Risk Aversion," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(1), pages 1-23.
  • Handle: RePEc:bla:jfnres:v:31:y:2008:i:1:p:1-23
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    References listed on IDEAS

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    1. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
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    1. repec:ebl:ecbull:eb-17-00614 is not listed on IDEAS
    2. repec:eee:joepsy:v:61:y:2017:i:c:p:191-202 is not listed on IDEAS
    3. repec:eee:finana:v:56:y:2018:i:c:p:52-72 is not listed on IDEAS
    4. Sandip Chattopadhyay & Ranjan Dasgupta, 2015. "Demographic and Socioeconomic Impact on Risk Attitudes of the Indian Investors - An Empirical Study," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(4), pages 601-623, April.
    5. Lemaster, Philip & Strough, JoNell, 2014. "Beyond Mars and Venus: Understanding gender differences in financial risk tolerance," Journal of Economic Psychology, Elsevier, vol. 42(C), pages 148-160.
    6. Campos-Vazquez, Raymundo M. & Cuilty, Emilio, 2014. "The role of emotions on risk aversion: A Prospect Theory experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 50(C), pages 1-9.
    7. Theuvsen, Ludwig, 2013. "Risks and risk management in agriculture," Problems of World Agriculture / Problemy Rolnictwa Światowego, Wydział Nauk Ekonomicznych, Uniwersytet Warszawski, vol. 13(28).
    8. Shirantha Heenkenda, 2015. "Determination of financial risk tolerance among different household sectors in Sri Lanka," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 5(11), pages 206-220, November.
    9. Heenkenda, Shirantha, 2014. "Determination of Financial Risk Tolerance among Different Household Sectors in Sri Lanka," MPRA Paper 67324, University Library of Munich, Germany.
    10. Ian Smith, 2016. "A study into UK Financial Planners opinions on risk tolerance and risk perception," Proceedings of International Academic Conferences 4006388, International Institute of Social and Economic Sciences.
    11. Brian Lucey & Charles Larkin, 2012. "Risk Tolerance and Demographic Characteristics: Preliminary Irish Evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp406, IIIS.

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