High risk investments generally require that the investor has the ability to hold it for the longer term yearsin order to allow shorter term performance issues time to resolve themselves.
The consistency and stability of preference is a basic assumption in the framework economists use to predict rational behavior. They would be willing to pay extra to have the security of knowing that unpleasant risks would be removed from their lives.Second, it is important to know why women appear to take on less risk in financial decisions than men. Consequently, many people just check off "medium-risk" on a form, thinking, quite understandably, that somewhere between the two extremes "should be about right". Byrnes, Miller, and Schafer analyzed the results of studies on the subject and found that, in most cases, men take systematically more risk than women. We will cover the benefits of transferring risk in many chapters of this text. The stable legal, economic, and political framework observed in Scandinavia, Western Europe, and North America is certainly conducive to a lower level of risk perception. This is evident if you look at a safer investment like a bond fund. Introduction The term risk tolerance is defined and used in different ways. Distinguishing between Perceived-Risk Tolerance and Apparent-Risk Tolerance The previous examples of emotional reactions to changing circumstances notwithstanding, most of us know who among our friends, colleagues, or clients is more risk averse and who is more risk tolerant or even risk seeking.
Similarly, when perceived risks are higher, we expect investors to be less likely to engage in the investment. Cultural Differences Just as differences in risk perception between women and men contribute to gender differences in risk taking, differences in perceived risk and their effects on risk taking have also been systematically observed across cultures.
The greater the risk, the greater the potential loss of value. Some undergraduate students of The Ohio State University answered 21 questions about financial risk taking on a five-point scale ranging from 1 extremely unlikely to engage in risky behavior to 5 extremely likely to engage in risky activity.
Furthermore, the appropriate category for an investor depends on several factors such as age, attitude to risk and the level of assets the investor owns.
The groups of investors that showed the highest-discount rates, who were thus least likely to invest for the long term, were located in Africa and Eastern Europe. In Weber et al. They found that Chinese investors were systematically more likely to engage in risky investments than US investors.