The Importance of Staying Positive: The Impact of Emotions on Attitude to Risk

Abstract

In this paper we examine the impact of emotions towards financial investments and emotions towards life in general on attitudes to financial risk using questionnaire data from 970 UK-based retail investors. We show that risk tolerance monotonically increases with positive emotions towards investments and life, and decreases with negative emotions. We incorporate a broader range of relevant emotions than in comparable existing studies and we show, perhaps surprisingly, that positive emotions have a stronger impact on risk tolerance than negative emotions. We find that emotions towards investments have a considerably greater explanatory power for the cross-section of risk aversion than gender, age, income, investment experience and investment knowledge. Our research sheds light on the different impacts that integral and incidental emotions have on retail investor financial decision-making. We suggest several implications for regulators and financial advisors, and we emphasise the importance for financial educators to support investors in developing emotional resilience.

Keywords: retail investors, risk tolerance, risk aversion, attitude to risk, emotions

JEL Classification: G11, G20, J14, C25