Risk behavior and finance: "Taking practical views of risk-taking"

Official URL: https://dx.doi.org/10.4324/9781315188911

In academic research in finance we find two approaches to risk, the “traditional” approach using historical relative frequency distributions and the emerging “behavioral” approach that concerns the findings from psychological experiments. Finance practitioners understand that risk ought to be taken into account when counseling investors for example, but have no idea how to do it. Neither of the academic approaches provides any guidance for them on how to assess individual attitudes towards risk or how to take these attitudes into account in making specific investment decisions. By deconstructing a survey given by a small investor advisor to married couples and administering it to a convenient sample of students, we show that in an apparent effort to appear sophisticated and scientific, practitioners address risk using a distorted version of “traditional” risk that ignores non-monetary considerations in evaluating outcomes and that ignores the importance of imagery in the assessment of risk. And there is no indication that “behavioral” risk has yet made any inroads into the popular consciousness.