Determinants of Risk Taking Behavior: The role of Risk Attitudes, Risk Perceptions and Beliefs

Our study analyzes determinants of investors' risk taking behavior. We find that investors' risk taking behavior, i.e. portfolio choices can be predicted using risk attitudes, risk perceptions and belief measures such as optimism and overconfidence. However, the predictive power of these determinants heavily depends on the domain in which it was elicited. More specifically, risk attitudes, risk perceptions and beliefs only allow us to predict investors' risk taking behavior if they are elicited in an investment related context. We think that our results could also benefit practitioners who could incorporate some of the determinants we have used in their investment advisory process.

Changes of expectations and risk attitudes and their impact on risk taking behavior

We use data from a repeated survey panel that was run with real online broker customers in September 2008, December 2008, and March 2009. In all three surveys subjects' risk attitudes, risk expectations, return expectations, and risk taking behavior, i.e. the proportion of wealth they are willing to invest into the stock market compared to a risk free asset, were elicited. Using this unique dataset we analyze whether risk taking, risk attitudes, and expectations change from one quarter to the other and whether the latter two have an impact on risk taking behavior. Our results indicate that risk taking behavior decreases substantially from September to December and from December to March. Similarly, risk expectations and return expectations also change substantially from one survey to the next one. In contrast, various measures of risk attitudes are fairly stable over the time periods. Interestingly, observed changes in risk taking behavior can primarily be attributed to changes in risk and return expectations but not to changes in past performance or changes in risk attitudes. Moreover, our findings are valuable for practitioners - who are urged by MiFID (2006) to elicit their customers' risk profiles and risk preferences - since we show that risk attitudes remain fairly stable and that changes in investment behavior can mainly be attributed to changes in expectations. Lastly, we illustrate that overconfidence seems to be a fairly stable construct between September and December and tends to decrease slightly from December to March

Determinants of Risk Taking Behavior: The role of Risk Attitudes, Risk Perceptions and Beliefs

Our study analyzes the determinants of investors' risk taking behavior. We find that investors' risk taking behavior such as portfolio choices can be predicted using risk attitudes, risk perceptions and belief measures such as optimism and overconfidence. However, the predictive power of these determinants heavily depends on the domain in which they were elicited. More specifically, risk attitudes, risk perceptions and beliefs only allow us to predict investors' risk taking behavior if they are elicited in an investment related context. We believe our results could benefit practitioners who could incorporate some of the determinants we have used in their investment advisory process

Overreaction in stock forecasts and prices

We study the degree of individual and aggregate market overreaction in a dynamic experimental auction market. In 13 sessions with overall 101 students we find overreaction to new information both in stock price forecasts and transaction prices. Interestingly, market forces do not seem to help in lowering overreaction to new information in our setting. Moreover, we illustrate that subjects are not able to learn from their previous failures and thus do not correct their erroneous beliefs. Hence, overreaction in our setting remains on a stable level although subjects can at least in theory learn from other market participants or from outcome feedback. Lastly, we find first experimental evidence for a positive relation between differences of opinion and trading volume in a continuous auction market with several market participants

How risky do I invest: The role of risk attitudes, risk perceptions, and overconfidence

Our study analyzes the determinants of investors' risk taking behavior. We find that investors' risk taking behavior is affected by their subjective risk attitude and by the risk and return of an investment alternative. Our results also suggest that consistent with previous findings in the literature objective or historical return and volatility of a stock are not as good predictors of risk taking behavior as subjective risk and return measures. Moreover, we illustrate that overconfidence or more precisely miscalibration has an impact on risk behavior as predicted by theoretical models. However, our results regarding the effect of various determinants on risk taking behavior heavily depends on the domain the respective determinant is elicited. We interpret this as an indication for an extended domain specificity. In particular with the Markets of Financial Instruments Directive (MiFID) coming into effect we believe practitioners could improve on their investment advising process by incorporating some of the determinants we argue to influence investment behavior

The influence of expectations, risk attitudes, and behavioral biases on investment decisions

In order to contribute to a better understanding of individual and aggregate decision making under risk and in order to analyze the influence of risk attitudes, expectations, and biases on decision making under risk, this thesis addresses the following research questions: 1. What are the main determinants of risky choice? Should financial institutions use lottery questions to elicit risk attitudes in a financial context? (Chapter 2) 2. Are risk attitudes and expectations stable over time? What drives changes in risk taking behavior? (Chapter 3) 3. Is overconfidence related to overreaction to new information? Do overreacting subjects invest in less efficient portfolios? (Chapter 4) 4. Is overreaction to new information present in a market setting where subjects receive feedback and can learn over time? (Chapter 5

Overreaction and investment choices : an experimental analysis

We study the degree of overreaction and the relation of overreaction and psychological biases as well as financial consequences of overreaction in a controlled experimental setting with 104 participants. The majority of participants tend to overreact, however, the degree of overreaction is heterogeneous. A few subjects even underreact. We also measure the overconfidence of the participants with a miscalibration scale. In line with theoretical predictions we find that more overconfident subjects overreact more. We also find that overreaction is associated with higher levels of risk taking after good signals and lower levels of risk taking after bad signals. Finally, overreaction harms portfolio efficiency, as measured by the Sharpe ratio

Opening the black box: From an individual bias to portfolio performance

We suggest an experimental design that can help opening the black box of investor behavior by documenting a channel of how biases affect portfolio performance. We study two of the most important investor biases (overreaction and overconfidence), show how they are related, and analyze their consequences for portfolio choice and resulting portfolio performance in a controlled experimental setting with 104 participants. The main innovation of our study is that we go beyond just documenting a correlation between overconfidence on the one hand and investor behavior as well as resulting portfolio performance on the other hand. We empirically identify the precise channel (overreaction) which is proposed by some models. We find that subjects overreact on average, i.e. forecasts are too optimistic after positive signals and too pessimistic after negative signals. Furthermore, there is greater overreaction when subjects are more overconfident. Moreover, overreaction is related to risk taking in a portfolio choice task thereby adversely affecting portfolio efficiency