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Financial Risk Perceptions: A Behavioral Perspective

In: Advances in Entrepreneurial Finance

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  • Robert A. Olsen

    (Decision Research)

Abstract

The generally accepted financial risk metrics, such as variance and Beta, are axiomatic mathematical constructions. They have mathematical validity but can be questioned on behavioral grounds. This chapter suggests a broader alternative approach. First, perception involves experiential content acquired as a result of human/world interaction. It is not merely the product of a passive internal “brain process.” Second, financial risk is hypothesized to be primarily a perception of potential loss as fabricated by an evolutionary dual decision-making process that embraces both affect and formal cognitive analysis. Thus of necessity, perceptions of risk contain both cognitive and affective attributes. Because man is by nature a social creature, perceived risk also entails risk attributes that manifest group concerns. These hypotheses are supported by a comprehensive literature review. Evidence is presented suggesting that this alternative perspective parsimoniously explains many current “risk/return” market anomalies.

Suggested Citation

  • Robert A. Olsen, 2011. "Financial Risk Perceptions: A Behavioral Perspective," Springer Books, in: Advances in Entrepreneurial Finance, chapter 0, pages 45-67, Springer.
    • Handle: RePEc:spr:sprchp:978-1-4419-7527-0_4
    DOI: 10.1007/978-1-4419-7527-0_4
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    Cited by:

    1. Saadaoui Mallek, Ray & Albaity, Mohamed & Molyneux, Philip, 2022. "Herding behaviour heterogeneity under economic and political risks: Evidence from GCC," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 345-361.
    2. Rassoul Yazdipour & William P. Neace, 2013. "Operationalizing a Behavioral Finance Risk Model: A Theoretical and Empirical Framework," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 16(2), pages 1-32, Spring.
    3. Bekiros, Stelios & Jlassi, Mouna & Naoui, Kamel & Uddin, Gazi Salah, 2018. "Risk perception in financial markets: On the flip side," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 184-206.
    4. Enrico Maria Cervellati & Pierpaolo Pattitoni & Marco Savioli, 2013. "Entrepreneurial Under-Diversification: Over Optimism and Overconfidence," Working Paper series 09_13, Rimini Centre for Economic Analysis, revised May 2016.
    5. E. M. Cervellati & P. Pattitoni & M. Savioli, 2016. "Cognitive Biases and Entrepreneurial Under-Diversification," Working Papers wp1076, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Bekiros, Stelios & Jlassi, Mouna & Naoui, Kamel & Uddin, Gazi Salah, 2017. "The asymmetric relationship between returns and implied volatility: Evidence from global stock markets," Journal of Financial Stability, Elsevier, vol. 30(C), pages 156-174.
    7. Bekiros, Stelios & Jlassi, Mouna & Lucey, Brian & Naoui, Kamel & Uddin, Gazi Salah, 2017. "Herding behavior, market sentiment and volatility: Will the bubble resume?," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 107-131.

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