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Determinants of Risk Taking Behavior: The role of Risk Attitudes, Risk Perceptions and Beliefs

  • Nosic, Alen

    ()

    (Sonderforschungsbereich 504)

  • Weber, Martin

    ()

    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

Our study analyzes determinants of investors' risk taking behavior. We find that investors' risk taking behavior, i.e. portfolio choices can be predicted using risk attitudes, risk perceptions and belief measures such as optimism and overconfidence. However, the predictive power of these determinants heavily depends on the domain in which it was elicited. More specifically, risk attitudes, risk perceptions and beliefs only allow us to predict investors' risk taking behavior if they are elicited in an investment related context. We think that our results could also benefit practitioners who could incorporate some of the determinants we have used in their investment advisory process.

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File URL: http://www.sfb504.uni-mannheim.de/publications/dp07-56.pdf
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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 07-56.

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Length: 33 pages
Date of creation: 31 Jul 2007
Date of revision:
Handle: RePEc:xrs:sfbmaa:07-56
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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  1. Donkers, A.C.D. & Melenberg, B. & van Soest, A.H.O., 1999. "Estimating Risk Attitudes Using Lotteries; A Large Sample Approach," Discussion Paper 1999-12, Tilburg University, Center for Economic Research.
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  5. Cesarini, David & Sandewall, Örjan & Johannesson, Magnus, 2003. "Confidence Interval Estimation Tasks and the Economics of Overconfidence," SSE/EFI Working Paper Series in Economics and Finance 535, Stockholm School of Economics.
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  7. Lin Peng & Wei Xiong, 2005. "Investor Attention: Overconfidence and Category Learning," NBER Working Papers 11400, National Bureau of Economic Research, Inc.
  8. Wang, F. Albert, 2001. "Overconfidence, Investor Sentiment, and Evolution," Journal of Financial Intermediation, Elsevier, vol. 10(2), pages 138-170, April.
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  14. Elke U. Weber & Richard A. Milliman, 1997. "Perceived Risk Attitudes: Relating Risk Perception to Risky Choice," Management Science, INFORMS, vol. 43(2), pages 123-144, February.
  15. Lawrence, Michael & O'Connor, Marcus, 1993. "Scale, Variability, and the Calibration of Judgmental Prediction Intervals," Organizational Behavior and Human Decision Processes, Elsevier, vol. 56(3), pages 441-458, December.
  16. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
  17. Terrance Odean, 1998. "Volume, Volatility, Price and Profit When All Traders Are Above Average," Finance 9803001, EconWPA.
  18. Terrance Odean, 1998. "Volume, Volatility, Price, and Profit When All Traders Are Above Average," Journal of Finance, American Finance Association, vol. 53(6), pages 1887-1934, December.
  19. Elke U. Weber & Christopher Hsee, 1998. "Cross-Cultural Differences in Risk Perception, but Cross-Cultural Similarities in Attitudes Towards Perceived Risk," Management Science, INFORMS, vol. 44(9), pages 1205-1217, September.
  20. Coval, Joshua D. & Thakor, Anjan V., 2005. "Financial intermediation as a beliefs-bridge between optimists and pessimists," Journal of Financial Economics, Elsevier, vol. 75(3), pages 535-569, March.
  21. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
  22. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  23. Kyle, Albert S & Wang, F Albert, 1997. " Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, vol. 52(5), pages 2073-90, December.
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