Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Fear of Losing Money, Not Spending Habits, Affects Investor Risk Tolerance, MU Study Finds

31.07.2014

As the U.S. economy slowly recovers, many investors remain wary about investing in the stock market. Investors’ “risk tolerance,” or their willingness to take risks, is an important factor for investors deciding whether, and how much, to invest in the stock market.

Now, Michael Guillemette, an assistant professor of personal financial planning in the University of Missouri College of Human Environmental Sciences, along with David Nanigian, an associate professor at the American College, analyzed the causes of risk tolerance and found that loss aversion, or the fear of losing money, is the primary factor that explains investors’ risk tolerance.

“Traditionally, it was believed that spending habits were the main driver of risk tolerance, meaning that the more variation an investor was willing to accept in their spending, the higher their risk tolerance for investments,” Guillemette said.

“Our study found that no such relation exists between risk tolerance and spending habits. Rather, loss aversion is a much more accurate indicator of risk tolerance. The more averse, or fearful, to losing money an investor is, the lower their tolerance seems to be for taking risks in the stock market. Consumer sentiment also appears to help explain investors’ risk tolerance, though not nearly as much as loss aversion.”

... more about:
»Financial »Investor »Money »aversion »risk »tolerance

For his study, Guillemette, who is also a certified financial planner, analyzed data from a risk tolerance survey taken from 2003-2010. Guillemette focused on three potential drivers of risk tolerance: loss aversion, changes in investor spending habits and changes in consumer sentiment levels.

Guillemette says it is important for risk assessment instruments to measure loss aversion, especially during times when the stock market is performing poorly. He says knowing how much investors are willing to risk at the worst of times is valuable for financial planners tasked with creating long-term investment plans.

“Financial planners probably acquire more accurate information on client risk preferences when risk tolerance is assessed in a hot state when stock prices are falling, compared to a cold state, when stock prices are rising,” Guillemette said.

“Now that we know loss aversion is a key factor that drives risk tolerance, it is important for investors to take steps to reduce their loss averse tendencies. This includes viewing investment returns infrequently, as investors allocate a greater percentage of their portfolio to stocks if they view their returns on an annual, as opposed to monthly, basis.”

Guillemette says that encouraging investors to view their portfolios in a holistic manner also will help reduce loss aversion. Finally, he says research has shown that financial planners with the Certified Financial Planner™ designation can help increase investor certainty during periods of market turmoil.”

This study is forthcoming in the Financial Services Review.

Editor’s Note: Guillemette pronounces his name “Gill-uh-met”.

Nathan Hurst | Eurek Alert!
Further information:
http://munews.missouri.edu/news-releases/2014/0730-fear-of-losing-money-not-spending-habits-affects-investor-risk-tolerance-mu-study-finds/

Further reports about: Financial Investor Money aversion risk tolerance

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Making lightweight construction suitable for series production

More and more automobile companies are focusing on body parts made of carbon fiber reinforced plastics (CFRP). However, manufacturing and repair costs must be further reduced in order to make CFRP more economical in use. Together with the Volkswagen AG and five other partners in the project HolQueSt 3D, the Laser Zentrum Hannover e.V. (LZH) has developed laser processes for the automatic trimming, drilling and repair of three-dimensional components.

Automated manufacturing processes are the basis for ultimately establishing the series production of CFRP components. In the project HolQueSt 3D, the LZH has...

Im Focus: Wonder material? Novel nanotube structure strengthens thin films for flexible electronics

Reflecting the structure of composites found in nature and the ancient world, researchers at the University of Illinois at Urbana-Champaign have synthesized thin carbon nanotube (CNT) textiles that exhibit both high electrical conductivity and a level of toughness that is about fifty times higher than copper films, currently used in electronics.

"The structural robustness of thin metal films has significant importance for the reliable operation of smart skin and flexible electronics including...

Im Focus: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Fighting drug resistant tuberculosis – InfectoGnostics meets MYCO-NET² partners in Peru

28.04.2017 | Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

 
Latest News

How Plants Form Their Sugar Transport Routes

28.04.2017 | Life Sciences

Protein 'spy' gains new abilities

28.04.2017 | Life Sciences

Researchers unravel the social network of immune cells

28.04.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>