As the U.S. economy continues to lag, many investors remain wary about taking risks with the stock market. Now, researchers at MU have concluded that this attitude toward investment risk-taking is more than just a recent trend.
Rui Yao, a University of Missouri assistant professor in the Personal Financial Planning department in the College of Human Environmental Sciences, has found that during the past two decades, the risk tolerance of investors is positively correlated to the movements of the stock market, meaning that investors are likely to invest more when market returns are high, and withdraw partially or even completely from the market when returns are negative.Rui Yao, a University of Missouri assistant professor in the Personal Financial Planning department in the College of Human Environmental Sciences.
Yao warns that this tendency will ultimately lead to ineffective investment tactics and unnecessary financial losses. She says that a positive correlation between risk tolerance and stock market returns shows that investors are buying stocks at a high price and selling them at a low price, which is not sound investment strategy.
“To maximize returns, the ideal strategy is to buy stocks at a low price, with the hope of selling them at a higher price,” Yao said. “However, many investors seem to be unwilling to take risks when the market is at a low point and seem content to only invest when the market is at a high point.”
In her study, Yao examined the Health and Retirement Study (HRS) to investigate changes of risk tolerance levels over time in response to stock market returns. The HRS is a longitudinal study conducted by the University of Michigan since 1992. During the course of the study, participants were given hypothetical scenarios about income gambles and were assigned to a level of risk tolerance based on their answers. The study tracked the responses of each participant between 1992 and 2006 and compared it to the state of the stock market at the time of each response.
Yao found that many Americans are not behaving according to rational economic model assumptions. She says that such changes in risk tolerance in response to market returns may be an indication that investors, and possibly their financial advisors, overestimate their ability to understand risk and assess individual risk tolerance.
“Having the ability to understand risks and assess risk tolerance has a direct impact on individual well-being,” Yao said. “Ultimately, improved financial education is the best way to help Americans overcome the bias of over-weighting recent market performance when making investment decisions.”
This study was published in the Journal of Economic Issues.
Nathan Hurst | EurekAlert!
How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung
Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT
Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...
A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.
Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...
In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.
“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...
The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.
The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...
Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water
In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...
16.11.2016 | Event News
01.11.2016 | Event News
14.10.2016 | Event News
05.12.2016 | Power and Electrical Engineering
05.12.2016 | Materials Sciences
05.12.2016 | Power and Electrical Engineering