The risk perceptions of individual investors

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Abstract

Risk perceptions of individual investors are studied by asking experimental questions to 2226 members of a consumer panel. Their responses are analyzed in order to find which risk measures they implicitly use. We find that most investors implicitly use more than one risk measure. For those investors who systematically perceive risk according to the same risk measure, semi-variance of returns is most popular. Semi-variance is similar to variance, but only negative deviations from the mean or another benchmark are taken into account. Stock investors implicitly choose for semi-variance as a risk measure, while bond investors favor probability of loss. Investors state that they consider the original investment to be the most important benchmark, followed by the risk-free rate of return, and the market return. However, their choices in the experimental questionnaire study reveal that the market return is the most important benchmark.
Original languageEnglish
Pages (from-to)226 - 252
Number of pages27
JournalJournal of Economic Psychology
Volume29
Issue number2
DOIs
Publication statusPublished - 2008
Externally publishedYes

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