The Indicators of Risk

Caterina Lucarelli and Giulio Palomba ()

Chapter 7 in Risk Tolerance in Financial Decision Making, 2011, pp 163-180 from Palgrave Macmillan

Abstract: Abstract Theoretically, financial risk tolerance depends upon different dimensions of risk. Some commentators (Cordell, 2002) have defined the term ‘risk tolerance’ to mean a combination of both ‘risk attitude’ (how much risk I choose to take) and ‘risk capacity’ (how much risk I can afford to take) (Roszkowski et al.). The first empirical goal of this study is to compare levels of financial risk tolerance which are obtained through alternative measurements: a traditional financial risk tolerance test, a psychophysiological test and the analysis of real life financial decisions. When using the financial risk tolerance test, we rely upon the self-evaluation of individuals; the computation from this test returns a biased risk tolerance level (BR). The second tool should provide a more objective evaluation of risk tolerance, given the fact that it relies on risky choices influenced by spontaneous somatic responses; it should return an unbiased risk tolerance level (UR). Finally, we considered the real life financial decisions of individuals obtaining a measure of the risk tolerance effectively assumed (the real life risk, RLR). Therefore we have the chance to compare how coherent RLR is in relation to both BR and UR.

Keywords: Risk Averter; Pension Fund; Risk Attitude; Financial Asset; Risk Tolerance (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-0-230-30382-9_8

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DOI: 10.1057/9780230303829_8

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