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Individual investors’ sophistication and expectations of risk and return

Author

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  • Oscar Stålnacke

Abstract

Purpose - The purpose of this paper is to investigate the relationship between individual investors’ level of sophistication and their expectations of risk and return in the stock market. Design/methodology/approach - The author combines survey and registry data on individual investors in Sweden to obtain 11 sophistication proxies that previous research has related to individuals’ financial decisions. These proxies are related to a survey measure regarding individual investors’ expectations of risk and return in an index fund using linear regressions. Findings - The findings in this paper indicate that sophisticated investors have lower risk and higher return expectations that are closer to objective measures than those of less-sophisticated investors. Originality/value - These results are important, since they enhance the understanding of the underlying mechanisms through which sophistication can influence financial decisions.

Suggested Citation

  • Oscar Stålnacke, 2019. "Individual investors’ sophistication and expectations of risk and return," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 11(1), pages 2-22, May.
    • Handle: RePEc:eme:rbfpps:rbf-08-2017-0087
    DOI: 10.1108/RBF-08-2017-0087
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    More about this item

    Keywords

    Expectations; Risk; D14; D81; D83; D84; G02;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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