A test of the relevant association between utility theory and subjective risk tolerance: Introducing the Profit-to-Willingness ratio

Wookjae Heo, John E. Grable and Abed G. Rabbani

Journal of Behavioral and Experimental Finance, 2018, vol. 19, issue C, 84-88

Abstract: The purpose of this study was to document the empirical linkage between an objective risk tolerance utility function and a subjective risk tolerance scale. This study utilized return data from 2008 through 2013 for the S&P 500 as a proxy for the objective risk tolerance utility function and risk tolerance data obtained from a multidimensional psychometrically designed financial risk tolerance scale. Results from this study add to the literature by introducing the Profit-to-Willingness ratio (P/W ratio) and by showing investments in the stock market exhibit strong associates with the risk attitudes and preferences of investors. It was determined that an increase in the S&P 500 was associated with a decrease in aggregate risk tolerance during the period of analysis, whereas a decrease in the index increased willingness to take financial risk during the same period.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:19:y:2018:i:c:p:84-88

DOI: 10.1016/j.jbef.2018.05.003

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