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

41 Pages Posted: 12 May 2020 Last revised: 7 Jan 2022

See all articles by Chris Brooks

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Ivan Sangiorgi

ICMA Centre, Henley Business School, University of Reading

Anastasiya Saraeva

Henley Business School

Carola Hillenbrand

University of Reading - Henley Business School

Kevin Money

University of Reading - Henley Business School

Date Written: April 18, 2020

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

Suggested Citation

Brooks, Chris and Sangiorgi, Ivan and Saraeva, Anastasiya and Hillenbrand, Carola and Money, Kevin, The Importance of Staying Positive: The Impact of Emotions on Attitude to Risk (April 18, 2020). Available at SSRN: https://ssrn.com/abstract=3579303 or http://dx.doi.org/10.2139/ssrn.3579303

Chris Brooks (Contact Author)

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Ivan Sangiorgi

ICMA Centre, Henley Business School, University of Reading ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Anastasiya Saraeva

Henley Business School ( email )

Greenlands
Reading, Henley on Thames RG6 6AH
United Kingdom

Carola Hillenbrand

University of Reading - Henley Business School ( email )

Greenlands
Reading, Henley on Thames RG6 6AH
United Kingdom

Kevin Money

University of Reading - Henley Business School ( email )

Greenlands
Reading, Henley on Thames RG6 6AH
United Kingdom

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