Do Market Returns Influence Risk Tolerance? Evidence from Panel Data

Abstract

Cognitive bias, Health and Retirement Study, Longitudinal study, Multilevel analysis, Risk tolerance,

Financial Risk Attitude and Behavior: Do Planners Help Increase Consistency?

“…Risk tolerance is not directly observable and, therefore, is challenging to measure (Yao & Curl, 2011). Two methods have been used in past research to measure risk tolerance: assessing risky investment behavior (objective measure) and using surveys to ask questions related to risk tolerance (subjective measure).…”

“…Therefore, they may move to safer assets and reduce their risk tolerance. Market news and events affect people's risk tolerance Yao & Curl, 2011); therefore, the period when people were interviewed affects their responses to risk tolerance questions. People of different cohorts may react to the same market news and events in different ways.…”

Perceived and Realized Risk Tolerance: Changes During the 2008 Financial Crisis

“…A preponderance of research has provided evidence that risk tolerance increases with wealth Hartog, Ferrer-i-Carbonell, & Jonker, 2002;Schooley & Worden, 1996) and income (Gibson, Michayluk, & Van de Venter, 2013;Hartog et al, 2002). Some evidence supported the belief that risk tolerance decreases with age (Gibson et al, 2013;Griesdorn et al, 2014;Hallahan, Faff, & McKenzie, 2004;Yao & Curl, 2011;Yao et al, 2004); other studies found the relationship with age to be nonlinear (Hallahan et al, 2004;Riley & Chow, 1992). Being married has been shown to have a significant negative impact on risk tolerance (Hallahan et al, 2004;Yao et al, 2004), although McInish (1982) did not find a significant relationship.…”

“…Studies have shown that risk tolerance tends to increase when market returns increase, and decrease when market returns decrease (Yao & Curl, 2011;Yao, Hanna, & Lindamood, 2004). This tendency can be explained by availability bias or recency effect, a phenomenon whereby most recent events have the most impact on perceptions.…”

“…Research has provided evidence that education has a positive effect on risk tolerance Hallahan et al, 2004;Hartog et al, 2002;Yao & Curl, 2011;Yao et al, 2004). Those who consulted a financial advisor exhibited lower risk tolerance (Gibson et al, 2013).…”