This paper focuses on risk tolerance which clearly influences financial decision making. We explore the emotional side of a risk taking behaviour, comparing alternative measures of financial risk tolerance resulting from the consilience of various disciplines. We wonder whether we financially act as we are or as we are supposed to be. So we compare an unbiased risk tolerance (UR), which is obtained from the psycho physiological reactions of individuals taking risk in laboratory; a biased risk tolerance (BR) obtained through a psychometrically validated questionnaire; and finally the actual financial choices (AFC) assumed in the real life. Our findings confirm that people tend to behave coherently to their self-representation and almost in stark contrast to what they feel. Nevertheless, experiments conducted on more than 440 individuals, with a large presence of trader and asset managers allow us to prove evidence of an ‘unconscious sleeping factor’ which is remarkable when the unbiased risk is much higher than the risk assumed in real life but, at the same time, higher than the self-evaluation. A large and precise sub-sample of the individuals we analyzed (especially females, older people and those with lower education/financial experience) self-evaluates as risk adverse, assumes low financial risks in the real life but hides a strong emotional attraction for risk. Our findings induce us to propose a model of mental functioning that places rationality and emotion side by side to a third factor: the counterfactual thinking and the wandering mind. The sleeping factor is totally absent in traders and asset managers.
Risk tolerance in financial decision making
BRIGHETTI, GIANNI
2010
Abstract
This paper focuses on risk tolerance which clearly influences financial decision making. We explore the emotional side of a risk taking behaviour, comparing alternative measures of financial risk tolerance resulting from the consilience of various disciplines. We wonder whether we financially act as we are or as we are supposed to be. So we compare an unbiased risk tolerance (UR), which is obtained from the psycho physiological reactions of individuals taking risk in laboratory; a biased risk tolerance (BR) obtained through a psychometrically validated questionnaire; and finally the actual financial choices (AFC) assumed in the real life. Our findings confirm that people tend to behave coherently to their self-representation and almost in stark contrast to what they feel. Nevertheless, experiments conducted on more than 440 individuals, with a large presence of trader and asset managers allow us to prove evidence of an ‘unconscious sleeping factor’ which is remarkable when the unbiased risk is much higher than the risk assumed in real life but, at the same time, higher than the self-evaluation. A large and precise sub-sample of the individuals we analyzed (especially females, older people and those with lower education/financial experience) self-evaluates as risk adverse, assumes low financial risks in the real life but hides a strong emotional attraction for risk. Our findings induce us to propose a model of mental functioning that places rationality and emotion side by side to a third factor: the counterfactual thinking and the wandering mind. The sleeping factor is totally absent in traders and asset managers.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
