Behavioral Risk Profiling: Measuring Loss Aversion of Individual Investors

29 Pages Posted: 7 Sep 2022

See all articles by Dennie van Dolder

Dennie van Dolder

University of Essex - Department of Economics

Jürgen Vandenbroucke

University of Antwerp

Date Written: August 24, 2022

Abstract

Loss aversion has been shown to be an important driver of people’s investment decisions. Encouraged by regulators, financial institutions are in search of ways to incorporate clients’ loss aversion in their risk classifications. The most critical obstacle appears to be the lack of a valid measurement method for loss aversion that can be straightforwardly incorporated into existing processes. This paper presents the results of two large-scale implementations of such a method within a risk-profiling application of an established financial institution. In total, we elicit loss aversion for 1,040 employees and 3,740 clients. We find that the observed distributions align with existing findings, and that loss aversion is largely independent of the risk-return preferences commonly used for investor classification. Furthermore, the correlations we observe between these two preferences and individuals’ background characteristics align with those observed in the literature. Loss aversion is strongly related to education—higher educated individuals being more loss averse—whereas risk aversion is strongly related to gender, age, and clients’ financial situation—women, more senior, and less wealthy participants being more risk averse. These findings support the conjecture that risk and loss aversion are complementary in capturing investor preferences.

Keywords: loss aversion, prospect theory, risk profile, risk preferences, individual investors, behavioral finance

JEL Classification: C91, D18, D81, D9, G11, G24

Suggested Citation

van Dolder, Dennie and Vandenbroucke, Jürgen, Behavioral Risk Profiling: Measuring Loss Aversion of Individual Investors (August 24, 2022). Available at SSRN: https://ssrn.com/abstract=4199169 or http://dx.doi.org/10.2139/ssrn.4199169

Dennie Van Dolder (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Jürgen Vandenbroucke

University of Antwerp ( email )

Prinsstraat 13
Room B404
Antwerp, B-2000
Belgium
++32/3/220.41.32 (Phone)
++32/3/220.47.99 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
97
Abstract Views
618
rank
377,440
PlumX Metrics