The Impact of Demographic Characteristics and Risk Tolerance on Investors’ Risk Perception and Portfolio Management
Keywords:
characteristics, Demographic, portfolio management, risk perception, risk toleranceAbstract
Behavioral finance focuses on psychological factors—such as risk perception and portfolio management—that play a crucial role in investors’ financial decisionmaking. This study investigates the effect of risk tolerance and demographic characteristics on risk perception and portfolio management, which, in turn, affect investors’ decisions. Applying structural equation modeling to data collected from a sample of 120 respondents, we find a significant and positive relationship between risk perception and risk tolerance. Similarly, certain demographic characteristics, such as age and education, have a significant and positive relationship with risk perception while others, such as income and gender, have a significant but negative relationship with risk perception. Risk tolerance has a significant but negative relationship with portfolio management. Age, education, and income have a significant but negative relationship with portfolio management, while gender has a significant and positive relationship with portfolio management.
References
Alderfer, C. P., & Bierman, H., Jr. (1970). Choices with risk: Beyond the
mean and variance. Journal of Business, 43, 341–353.
Bashir, T., Ahmed, H. R., Jahangir, S., Zaigham, S., Saeed, H., & Shafi, S.
(2013). Investment preferences and risk level: Behavior of salaried
individuals. IOSR Journal of Business and Management, 10(1), 68–78.
Bashir, T., Uppal, S. T., Hanif, K., Yaseen, S. M., & Saraj, K. (2013).
Financial risk-tolerant attitude: Empirical evidence from Pakistan.
European Scientific Journal, 9(19), 200–209.
Cordell, D. M. (2002). Risk tolerance in two dimensions. Journal of
Financial Planning, 15(5), 30–33.
Faff, R., Hallahan, T., & McKenzie, M. (2011). Women and risk tolerance
in a changing world. International Journal of Accounting and
Information Management, 19(2), 100–117.
Hariharana, G., Chapman, K. S., & Domian, D. L. (2000). Risk tolerance
and asset allocation for investors nearing retirement. Financial
Services Review, 9, 159–170.
Hoffmann, A., Post, T., & Pennings, J. (2013). Individual investor
perceptions and behavior during the financial crisis. Journal of
Banking and Finance, 37, 60–74.
Klos, A., Weber, E. U., & Weber, M. (2005). Investment decisions and time
horizon: Risk perception and risk behavior in repeated gambles.
Management Science, 51, 1777–1790.
Larkin, C., Lucey, B. M., & Mulholland, M. (2012). Risk tolerance and
demographic characteristics: Preliminary Irish evidence (Discussion
Paper No. 406). Dublin, Ireland: Institute for International
Integration Studies, Trinity College.
MacGregor, D., Slovic, P., Berry, M., & Evensky, H. R. (1999). Perception
of financial risk: A survey study of advisors and planners. Journal
of Financial Planning, 12, 68–86.
Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91.
Ramachandran, T., Rajeswari, P. S., & Chinnathambi, S. (2011, October).
Investment behavior and risk-return perception of investors in equity
shares. Paper presented at the 2011 International Research
Conference and Colloquium on Contemporary Research Issues
and Challenges in Emerging Economies, Universiti Tun Abdul
Razak, Kuala Lumpur, Malaysia.
Shafi, H., Akram, M., Hussain, M., Sajjad, S. I., & Rehman, K. (2011).
Relationship between risk perception and employee investment
behavior. Journal of Economics and Behavioral Studies, 3(6), 345–351.
Sitkin, S. B., & Pablo, A. L. (1992). Reconceptualizing the determinants of
risk behavior. Academy of Management Review, 17(1), 9–38.
Sitkin, S. B., & Weingart, L. R. (1995). Determinants of risky decisionmaking behavior: A test of the mediating role of risk perceptions
and propensity. Academy of Management Journal, 38(6), 1573–1592.
Slovic, P. (2000). The perception of risk. London, UK: Earthscan Publications.
Van de Venter, G., Michayluk, D., & Davey, G. (2012). A longitudinal
study of financial risk tolerance. Journal of Economic Psychology,
(4), 794–800.
Vlaev, I., Chater, N., & Stewart, N. (2009). Dimensionality of risk
perception: Factors affecting consumer understanding and
evaluation of financial risk. Journal of Behavioral Finance, 10, 158–181.
Wang, X. L., Shi, K., & Fan, H. X. (2006). Psychological mechanisms of
investors in Chinese stock markets. Journal of Economic Psychology,
, 762–780.
Weber, E. U., & Hsee, C. K. (1998). Cross-cultural differences in risk
perception but cross-cultural similarities in attitudes towards risk.
Management Science, 44, 1205–1217.
Yao, R., Sharpe, D. L., & Wang, F. (2011). Decomposing the age effect on
risk tolerance. Journal of Socio-Economics, 40, 879–887.
Yordanova, D. I., & Alexandrova-Boshnakova, M. I. (2011). Gender effects on
risk-taking of entrepreneurs: Evidence from Bulgaria. International
Journal of Entrepreneurial Behavior and Research, 17(3), 272–295.
