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Variance and beta as perceived risk: questionable science

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  • Robert A. Olsen

Abstract

Purpose - The purpose of this paper is to discuss the origin of variance and beta as risk measures and to identify their shortcomings as perceived risk metrics. Design/methodology/approach - The paper analyses seminal literature from economics, psychology, and neuroscience that have relevance to financial risk. Findings - There is empirical evidence that investors are loss‐averse and affectively influenced. Variance and beta as conventionally calculated are flawed because they do not take into account the inherent indeterminacy of the investor's world. Practical implications - The paper demonstrates that perceived risk will be systematically mis‐measured and that risk premium/return anomalies will prevail until a more affective and multidimensional risk metric is utilized. Originality/value - The value of the paper lies in its concise and clear identification of financial risk measurement issues and a suggested direction for remediation.

Suggested Citation

  • Robert A. Olsen, 2009. "Variance and beta as perceived risk: questionable science," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 1(2), pages 97-105, June.
    • Handle: RePEc:eme:qrfmpp:v:1:y:2009:i:2:p:97-105
    DOI: 10.1108/17554170910975919
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    Cited by:

    1. John Holland, 2011. "Behaviour and Investment Actions within Fund Managers and their Markets - Developing and analysing a grounded theory of fund management," Working Papers CEB 11-057, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    Financial risk; Risk analysis;

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