Misclassifications in Financial Risk Tolerance

29 Pages Posted: 18 Feb 2012

See all articles by Caterina Lucarelli

Caterina Lucarelli

Università Politecnica delle Marche

Gianni Brighetti

University of Bologna

Pierpaolo Uberti

Università degli Studi di Genova - Department of Economics and Quantitative Methods (DIEM)

Date Written: February 17, 2012

Abstract

This paper analyzes the empirical risk tolerance of individuals. Rare empirical evidence shows the role of personal behavior in both propensity toward financial risk and risk aversion. By using a test which mimics the financial decision process in a laboratory setting for 445 individuals, we obtained an ex-post experimental measure for individual risk tolerance. Predictive classification models allow us to evaluate the forecasting accuracy of two alternative risk tolerance assessments: a psychometrically derived questionnaire and a psycho- physiological experiment. Our findings show that misclassifications resulting from the questionnaire are massive: individuals asked to self-assess their risk tolerance reveal a high probability of failing their judgment, i.e., they behave as if they were risk takers, while defining themselves as risk-averse (and vice versa). Conversely, when considering somatic activation, misclassifications are considerably lower. Emotions are confirmed to drive the financial risk- taking process, enhancing the accuracy of the individual risk tolerance forecasting activity.

Keywords: decision-making, individual behavior, classification methods, risk tolerance questionnaire, Iowa gambling task, skin conductance response

JEL Classification: D81, C91, C38

Suggested Citation

Lucarelli, Caterina and Brighetti, Gianni and Uberti, Pierpaolo, Misclassifications in Financial Risk Tolerance (February 17, 2012). Available at SSRN: https://ssrn.com/abstract=2007023 or http://dx.doi.org/10.2139/ssrn.2007023

Caterina Lucarelli (Contact Author)

Università Politecnica delle Marche ( email )

Piazzale Martelli 8
Ancona, 18039
Italy
0039.071.2207196 (Phone)
0039.071.2207253 (Fax)

Gianni Brighetti

University of Bologna ( email )

Piazza Scaravilli 2
Bologna, 40100
Italy

Pierpaolo Uberti

Università degli Studi di Genova - Department of Economics and Quantitative Methods (DIEM) ( email )

Via Vivaldi, 5
Genova, 16126
Italy
++39.010.209.5225 (Phone)
++39.010.209.5269 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
221
Abstract Views
1,135
rank
138,232
PlumX Metrics