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How Return and Risk Experiences Shape Investor Beliefs and Preferences

52 Pages Posted: 4 Dec 2012 Last revised: 17 Jun 2014

Arvid O. I. Hoffmann

University of Adelaide - Business School; Network for Studies on Pensions, Aging and Retirement (Netspar)

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: September 26, 2013

Abstract

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

Hoffmann, Arvid O. I. and Post, Thomas, How Return and Risk Experiences Shape Investor Beliefs and Preferences (September 26, 2013). Netspar Discussion Paper No. 11/2012-044. Available at SSRN: https://ssrn.com/abstract=2184220 or http://dx.doi.org/10.2139/ssrn.2184220

Arvid O. I. Hoffmann (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Network for Studies on Pensions, Aging and Retirement (Netspar)

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

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