The Risk Perceptions of Individual Investors

Veld, Chris; Veld-Merkoulova, Yulia V.

doi:10.2139/ssrn.821412

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The Risk Perceptions of Individual Investors

51 Pages Posted: 19 Oct 2005

See all articles by Chris Veld

Yulia V. Veld-Merkoulova

Monash University - Department of Finance; Financial Research Network (FIRN)

Date Written: May 31, 2007

Abstract

Risk perceptions of individual investors are studied by asking experimental questions to 2,226 members of a consumer panel. Their responses are analyzed in order to find which risk measures they implicitly use. We find that most investors implicitly use more than one risk measure. For those investors who systematically perceive risk according to the same risk measure, semi-variance of returns is most popular. Semi-variance is similar to variance, but only negative deviations fro the mean or another benchmark are taken into account. Stock investors implicitly choose for semi-variance as a risk measure, while bond investors favor probability of loss. Investors state that they consider the original investment to be the most important benchmark, followed by the risk-free rate of return, and the market return. However, their choices in the experimental questionnaire study reveal that the market return is the most important benchmark.

Keywords: individual investors, risk profile, variance, downside risk measures, shortfall, semi-variance, experimental questionnaire study

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Veld, Chris and Veld-Merkoulova, Yulia V., The Risk Perceptions of Individual Investors (May 31, 2007). Available at SSRN: https://ssrn.com/abstract=821412 or http://dx.doi.org/10.2139/ssrn.821412