Target return as efficient driver of risk-taking

D’Hondt, Catherine (), Rudy De Winne and Aleksandar Todorovic
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D’Hondt, Catherine: Université catholique de Louvain, LIDAM/LFIN, Belgium
Aleksandar Todorovic: Université catholique de Louvain, LIDAM/LFIN, Belgium

No 2023014, LIDAM Reprints LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: Purpose – This paper examines whether target returns act as specific goals that impact risk-taking when individuals make investment decisions. Design/methodology/approach – Using an experimental setting, the authors assign either a low or a high target return to participants and ask them to make independent investment decisions as the risk-free rate fluctuates around their target return and, for some of them, becomes negative. Findings – Building on cumulative prospect theory, the authors find that the prevailing reference point of participants is the target return, regardless of the level of the risk-free rate. This result still holds even when the risk-free rate is negative, suggesting that (1) the target return drives risk-taking more than does a zero-threshold and (2) negative rates are limited as a tool to stimulate appetites for risk. In a follow-up study, the authors show that these conclusions remain valid when the target return is endogenously determined. Originality/value – The authors’ original approach, which pioneers the use of target returns in both the positive and negative interest rate contexts, provides insightful results about the “reach for yield” among regular people.

Keywords: Risk-taking; Target return; Reference point; Negative interest rates (search for similar items in EconPapers)
JEL-codes: G11 G21 G40 G41 G51 (search for similar items in EconPapers)
Pages: 37
Date: 2023-05-08
Note: In: Review of Behavioral Finance, 2023
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Journal Article: Target return as efficient driver of risk-taking (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ajf:louvlr:2023014

DOI: 10.1108/RBF-09-2022-0216

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