How Return and Risk Experiences Shape Investor Beliefs and Preferences
52 Pages Posted: 4 Dec 2012 Last revised: 17 Jun 2014
Date Written: September 26, 2013
Beliefs and preferences drive investors’ trading and risk-taking behavior, but what shapes their beliefs and preferences? Using a unique combination of brokerage records and matching monthly survey measurements, we examine how individual investors update their beliefs (return expectations and risk perceptions) and preferences (risk tolerance) in response to individual return and risk experiences. Past returns positively impact return expectations and risk tolerance, and negatively impact risk perceptions. Realized risk, however, does not impact investor beliefs and preferences. Investors’ lack of awareness of realized risk is related to the complexity of standard risk measures, sophistication, and potentially the salience of return signals.
Keywords: Individual investors, return experiences, risk experiences, investor beliefs, investor preferences
JEL Classification: D14, D81, D83, D84, G02, G11
Suggested Citation: Suggested Citation