Risk Preferences of Small Private Investors: The Role of Dispositional Tendency and Aspirations

Authors:

• Joanna Sokołowska,
• Piotr Makowiec

Abstract

In the dominant approach, it is assumed that risk preferences reflect the shape of utility function. Here, the alternative approach is, in which risk preferences are result of: (1) individual differences in focus on either potential or security that impacts decision weights put to good and bad outcomes and (2) aspirations that impact the trade-off between risk and return. In line with this approach: (1) individuals focused on potential are more risk prone than those focused on security and (2) investors, who have high aspirations are risk seeking. Sensation-seeking scale was used as a proxy for the security/potential focus. It was expected that investors with high need for sensation seeking would be more risk prone than those with a low need for sensation seeking. As for aspirations, it was expected that investors set high aspirations in a bull market and low aspirations in a bear market. Thus, they are risk avoiding in a bear market and risk seeking in a bull market. These hypotheses were supported in an experiment carried out via the Internet with small private investors (N=292).