Explaining Heterogeneity in Risk Appetite and Tolerance: The Turkish Case*,†

Although most of the traditional economic theories used to explain investor behaviour assume full investor rationality, experience proves otherwise. In this study, we examine a number of important determinants of risk appetite and tolerance, including gender, education and knowledge of financial services and loss aversion. We do this by designing a questionnaire to measure the level of risk appetite and tolerance, together with various demographic characteristics and loss aversion. The survey is administered among a random sample of 1,648 respondents from Turkey. We find that on average men exhibit a higher level of risk appetite and tolerance than women, thus suggesting a clear gender divide in terms of investment behaviour. Furthermore, knowledge of financial services is associated with higher levels of both risk appetite and tolerance, with younger respondents also exhibiting similar patterns of behaviour. By contrast, loss-averse respondents are less open and tolerant of risk, which indicates that behavioural biases such as loss aversion can have a meaningful impact on investment decisions, at odds with traditional models based on rational choice theory. The findings have a number of important implications for investment behaviour and education, including the importance of gender balance within investment committees in order to ensure a more even distribution of risk behaviour, as well as the need to incorporate considerations related to loss aversion in all aspects of policymaking and regulation.