What Makes an Investment Risky? An Analysis of Price Path Characteristics
53 Pages Posted: 10 Jun 2019 Last revised: 11 Sep 2020
Date Written: October 31, 2019
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
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