How Investor Perceptions Drive Actual Trading and Risk-Taking Behavior
Journal of Behavioral Finance, 16 (1), pp. 94-103. 2015
24 Pages Posted: 6 Dec 2011 Last revised: 25 Mar 2015
Date Written: March 13, 2013
Recent work in behavioral finance showed how investors’ perceptions (i.e., return expectations, risk tolerance, and risk perception) affect hypothetical trading and risk-taking behavior. However, are such perceptions also capable of explaining actual trading and risk-taking behavior? To answer this question, we combine monthly survey data with matching brokerage records to construct a panel data set allowing us to simultaneously examine investor perceptions and behavior. We find that investor perceptions and changes therein are important drivers of actual trading and risk-taking behavior: Investors with higher levels of and upward revisions of return expectations are more likely to trade, have higher turnover, trade larger amounts per transaction, and are more likely to use derivatives. Investors with higher levels of and upward revisions in risk tolerance are more likely to trade, have higher buy-sell ratios, use limit orders more frequently, and hold riskier portfolios. Investors with higher levels of risk perception are more likely to trade, have higher turnover, have lower buy-sell ratios, and hold riskier portfolios.
Keywords: individual investors, return expectations, risk perception, risk tolerance, stock trading, risk-taking behavior
JEL Classification: D14, D81, G02, G11
Suggested Citation: Suggested Citation