Volatility Inadaptability: Investors Care About Risk, But Can't Cope with Volatility

Abstract

This paper investigates two research questions: Do investors see a relationship between risk attitude and the amount invested risky? Further, do investors adjust their investments if provided with assets with different volatilities? In an experimental study, investors allocate an amount between a risky and a risk-free asset. Investors' risk attitude predicts risk taking. Investors are, however, unable to adapt to risky assets with different volatilities; they choose almost the same allocation to the risky asset independently of its volatility, thus amassing significantly different portfolios.

Keywords: portfolio choice, portfolio selection, risk-taking, volatility, volatility inadaptability

JEL Classification: G11