What Makes an Investment Risky? An Analysis of Price Path Characteristics

53 Pages Posted: 10 Jun 2019 Last revised: 6 Nov 2019

See all articles by Charlotte Borsboom

Charlotte Borsboom

Radboud University Nijmegen

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: October 31, 2019

Abstract

We examine the influence of financial asset historical price path characteristics on investors' risk perception, return beliefs and investment propensity. To that end, we run a series of survey experiments in which we present various price patterns to individuals with vested interest in financial matters. Our findings reveal that price paths with identical daily and monthly returns (and consequently identical return standard deviation) can lead to substantially different risk perception by investors, indicating that historical volatility is not sufficient to explain risk perception. Salient features such as highs, lows and crashes are the most influential drivers of perceived risk in price paths. Return forecasts are primarily driven by past overall returns and the most recent price developments. Perceived risk and return beliefs strongly predict investment propensity.

Keywords: behavioral finance, experimental finance, price paths, path characteristics, investor risk perception, investment decision-making

JEL Classification: D14, D18, G11, G41

Suggested Citation

Borsboom, Charlotte and Zeisberger, Stefan, What Makes an Investment Risky? An Analysis of Price Path Characteristics (October 31, 2019). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3392623 or http://dx.doi.org/10.2139/ssrn.3392623

Charlotte Borsboom (Contact Author)

Radboud University Nijmegen ( email )

Postbus 9108
Nijmegen, 6500 HK
Netherlands

Stefan Zeisberger

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Z├╝rich
Switzerland

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