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What makes an investment risky? An analysis of price path characteristics

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  • Borsboom, Charlotte
  • Zeisberger, Stefan

Abstract

We examine the influence of financial asset historical price path characteristics on investors’ risk perception, return beliefs and investment propensity. To that end, we run a series of survey experiments in which we present various price patterns to individuals with vested interest in financial matters. Our findings reveal that price paths with identical daily and monthly returns (and consequently identical return standard deviation) can lead to substantially different risk perception by investors, indicating that historical volatility is insufficient to explain risk perception. Salient features such as highs, lows and crashes are the most influential drivers of perceived risk in price paths. Return forecasts are primarily driven by past overall returns and the most recent price developments. Perceived risk and return beliefs strongly predict investment propensity.

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  • Borsboom, Charlotte & Zeisberger, Stefan, 2020. "What makes an investment risky? An analysis of price path characteristics," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 92-125.
    • Handle: RePEc:eee:jeborg:v:169:y:2020:i:c:p:92-125
    DOI: 10.1016/j.jebo.2019.11.002
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    9. Nobuyuki Hanaki & Cars Hommes & Dávid Kopányi & Anita Kopányi-Peuker & Jan Tuinstra, 2023. "Forecasting returns instead of prices exacerbates financial bubbles," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 1185-1213, November.
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    More about this item

    Keywords

    Behavioral finance; Experimental finance; Price paths; Path characteristics; Investor risk perception; Investment decision-making;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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