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2020 Conference

May 18–20, 2020

Proposal authors can use this tool to see where they have been placed in the agenda for a Symposium, an Oral Session, or a Featured Research Session Poster.

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B1a Do Investors Who Overestimate Financial Risk Tolerance Have Higher Portfolio Risk Than Those Who Do Not?

Wednesday, May 20, 2020 at 11:00 AM–12:30 PM CDT
Room 1
Key Words

Estimation Error, Investment, Portfolio, Risk Tolerance

Short Description

The purpose of the study is to compare portfolio risk undertaken by the investors who make an estimation error in risk tolerance to those who do not make estimation error. Although some investors systematically miss-assess their financial risk tolerance—some overestimate while others underestimate, nevertheless, investors who accurately assess their risk tolerance are more likely to hold riskier portfolio than those who overestimate their risk tolerance. A differential prediction model was used to assess the presence of estimation errors. We used investment risk tolerance data from 2017-2018 for this study. The results showed that the survey participants did show the presence of estimation errors in financial risk tolerance. These estimation errors were associated with portfolio risk controlling for demographic variables, and utilization of professional when making investment decisions. Most importantly, investors who exhibited estimation errors both positive or negative were less likely to hold risky assets in their portfolio compared to those who do not make estimation error. It is important for financial advisors to be cautious in relying on any subjective assessment of clients’ financial risk tolerance that is not aligned with a psychometric assessment.

First & Corresponding Author

Abed Rabbani, University of Missouri
Authors in the order to be printed

Abed Rabbani

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