Behavioral risk profiling: Measuring loss aversion of individual investors

Dennie van Dolder and Jurgen Vandenbroucke

Journal of Banking & Finance, 2024, vol. 168, issue C

Abstract: Loss aversion has been shown to be a key driver of people's investment decisions. Encouraged by regulators, financial institutions are seeking ways to integrate this behavioral factor into client risk classifications. A critical obstacle is the lack of a valid measurement method for loss aversion that can be straightforwardly incorporated into existing processes. This paper reports on two large-scale implementations of such a method within the risk-profiling application of an established financial institution. We elicit loss aversion for 1,040 employees and 3,740 clients, observing distributions that align with existing findings. Importantly, our results demonstrate that loss aversion is largely independent of the risk-return preferences commonly used for investor classification. Furthermore, the correlations we observe between these two preferences and individuals’ background characteristics align with previous research: loss aversion is strongly correlated with education—higher educated individuals exhibit greater loss aversion—whereas risk aversion is related to gender, age, and financial status—women, older individuals, and those less financially secure are more risk averse. These findings support the conjecture that risk and loss aversion are complementary in capturing investor intent.

Keywords: Loss aversion; Prospect theory; Risk profile; Risk preferences; Individual investors; Behavioral finance (search for similar items in EconPapers)
JEL-codes: C91 D18 D81 D9 G11 G24 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426624002073
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:168:y:2024:i:c:s0378426624002073

DOI: 10.1016/j.jbankfin.2024.107293

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().