How Risky Do I Invest: The Role of Risk Attitudes, Risk Perceptions, and Overconfidence

Decision Analysis, Vol. 7, pp 282-301, 2010

50 Pages Posted: 1 Aug 2007 Last revised: 11 Apr 2011

See all articles by Alen Nosic

Alen Nosic

affiliation not provided to SSRN

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: March 6, 2010

Abstract

Our study analyzes the determinants of investors' risk taking behavior. We find that investors' risk taking behavior is affected by their subjective risk attitude and by the risk and return of an investment alternative. Our results also suggest that consistent with previous findings in the literature objective or historical return and volatility of a stock are not as good predictors of risk taking behavior as subjective risk and return measures. Moreover, we illustrate that overconfidence or more precisely miscalibration has an impact on risk behavior as predicted by theoretical models. However, our results regarding the effect of various determinants on risk taking behavior heavily depends on the domain the respective determinant is elicited. We interpret this as an indication for an extended domain specificity. In particular with the Markets of Financial Instruments Directive (MiFID) coming into effect we believe practitioners could improve on their investment advising process by incorporating some of the determinants we argue to influence investment behavior.

Keywords: Overconfidence, Optimism, Risk Attitude, Risk Perception, Risk Taking, Domain Specificity

JEL Classification: G1

Suggested Citation

Nosic, Alen and Weber, Martin, How Risky Do I Invest: The Role of Risk Attitudes, Risk Perceptions, and Overconfidence (March 6, 2010). Decision Analysis, Vol. 7, pp 282-301, 2010. Available at SSRN: https://ssrn.com/abstract=1004002

Alen Nosic (Contact Author)

affiliation not provided to SSRN ( email )

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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