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The Indicators of Risk

In: Risk Tolerance in Financial Decision Making

Author

Listed:
  • Caterina Lucarelli
  • Giulio Palomba

Abstract

Theoretically, financial risk tolerance depends upon different dimensions of risk. Some commentators (Cordell, 2002) have defined the term ‘risk tolerance’ to mean a combination of both ‘risk attitude’ (how much risk I choose to take) and ‘risk capacity’ (how much risk I can afford to take) (Roszkowski et al.). The first empirical goal of this study is to compare levels of financial risk tolerance which are obtained through alternative measurements: a traditional financial risk tolerance test, a psychophysiological test and the analysis of real life financial decisions. When using the financial risk tolerance test, we rely upon the self-evaluation of individuals; the computation from this test returns a biased risk tolerance level (BR). The second tool should provide a more objective evaluation of risk tolerance, given the fact that it relies on risky choices influenced by spontaneous somatic responses; it should return an unbiased risk tolerance level (UR). Finally, we considered the real life financial decisions of individuals obtaining a measure of the risk tolerance effectively assumed (the real life risk, RLR). Therefore we have the chance to compare how coherent RLR is in relation to both BR and UR.

Suggested Citation

  • Caterina Lucarelli & Giulio Palomba, 2011. "The Indicators of Risk," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Caterina Lucarelli & Gianni Brighetti (ed.), Risk Tolerance in Financial Decision Making, chapter 7, pages 163-180, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-0-230-30382-9_8
    DOI: 10.1057/9780230303829_8
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