Does Financial Investment Decision-Making Relate To Risk Tolerance? Evidence from the United States

Musab Ababneh

doi:10.18535/ijsrm/v13i03.em01

Abstract

The intolerance of uncertainty scale (IUS), which measures individual differences, may have a moderating effect on how investors allocate their portfolios among securities with varying risk levels. This study explores this possibility. The study’s participants decided how much money to put into securities with varying risk profiles. The securities ranged from government securities (safe) to more risky securities. The investment risk of each security is manipulated by altering beta or market risk, expected return, and standard deviation of the return. The findings show that less risk-tolerant individuals invested less capital in riskier stocks and more money in safer government securities. However, those with more risk tolerance exploited more money in the less hazardous investment. As anticipated, those with less risk tolerance allocated more capital to the more secure stocks.

References

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Markowitz, H. M. (1952). Portfolio selection. The Journal of Finance, 7, 77-91.Google Scholar ↗
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Schirripa, F., & Tecotzky, N. D. (2000). An optimal frontier. Journal of Portfolio Management, 26, 29-40.Google Scholar ↗
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Weber, E.U., Blais, A., & Betz, N. E. (2002). A domain specific risk attitude scale: Measuring risk perceptions and risk behaviors. Journal of Behavioral Decision Making, 15, 263-290.Google Scholar ↗
Wells, A. & Matthews, G. (1994). Attention and emotion: A clinical perspective. Hove: Lawrence Erlbaum.Google Scholar ↗
Zeidner, M. (1998). Test anxiety: The state of the art. New York, NY: Plenum Press.Google Scholar ↗

[refR-1] Aikins, D.E., & Craske, M.G. (2001). Cognitive theories of generalized anxiety disorder.Psychiatric Clinics of North America, 24, 57–74.Google Scholar ↗

[refR-2] American Psychiatric Association (2000). Diagnostic and statistical manual of mental disorders (4th ed., text revision). Washington, DC: Author.Google Scholar ↗

[refR-3] Borkovec, T. D., & Lyonfields, J. D. (1993). Worry: Thought suppression of emotional processing. In H.W. Krohne (Ed.), Attention and avoidance: Strategies in coping with aversiveness (pp.101–118). Kirkland, WA: Hogrefe & Huber Publishers.Google Scholar ↗

[refR-4] Borkovec, T. D., Robinson, E., Pruzinsky, T., & DePree, J. A. (1983). Preliminary exploration of worry: Some characteristics and processes. Behaviour Research and Therapy, 21, 9–16.Google Scholar ↗

[refR-5] Borkovec, T. D., Ray, W. J., & Stober, J. (1998). Worry: A cognitive phenomenon intimately linked to affective, physiological, and interpersonal behavioral processes. Cognitive Therapy and Research, 22, 561–576.Google Scholar ↗

[refR-6] Brewer, N. T., Chapman, B. C., Gibbons, F. X., Gerrard, M., McCaul, K. D., & Weinstein, N. D. (2007). Meta - analysis of the relationship between risk perception and health behavior: The example of vaccination. Health Psychology, 26, 136-145.Google Scholar ↗

[refR-7] Chou, S. R., Huang, G. L., & Hsu, H. L. (2010). Investor attitudes and behavior toward inherent risk and potential returns in financial products. Retrieved from http://www.eurojournals.com/irjfe_44_02.pdf.Google Scholar ↗

[refR-8] Cooper, I., Kaplanis, E. (1994). Home bias in equity portfolios, inflation hedging an international capital market equilibrium. Review of Financial Studies, 7, 45-60.Google Scholar ↗

[refR-9] Daniel, K., Hirshleifer, D. and Subrahmanyam, A. (1998). Investor psychology and security market under- and overreactions. Journal of Finance, 53, 1839-86.Google Scholar ↗

[refR-10] DeBruin, G. O. (2006). Stop your worries about worrying! An investigation into the cognitive correlates of worry (Doctoral Dissertation). Retrieved from http://repub.eur.nl/res/pub/8065/proefschrift%20inhoud.pdf.Google Scholar ↗

[refR-11] DeBruin, G.O., Rassin, E., & Muris, P. (2006). Worrying in the lab: Does intolerance of uncertainty have predictive value? Behaviour Change, 23, 138-147.Google Scholar ↗

[refR-12] Droms, W. G. (1987). Investment asset allocation for PFP clients. Journal of Accountancy, 163, 114-118.Google Scholar ↗

[refR-13] Dugas, M. J., Gagnon, F., Ladouceur, R., & Freeston, M. H. (1998). Generalized anxiety disorder: A preliminary test of a conceptual model. Behaviour Research and Therapy, 36, 215-226.Google Scholar ↗

[refR-14] Eagley, A. H. & Chaiken, S. (1993). The psychology of attitudes. Fort Worth, TX: Harcourt Brace Jovanovich, Inc.Google Scholar ↗

[refR-15] Eysenck, M.W. (1992). Anxiety: The cognitive perspective. Hillsdale, NJ: Erlbaum.Google Scholar ↗

[refR-16] Freeston, M. H., Rheaume, J., Letarte, H., Dugas, M. J., & Ladouceur, R. (1994). Why do people worry? Personality and Individual Differences, 17, 791–802Google Scholar ↗

[refR-17] Hay, J. L., McCaul, K. D., & Magnan, R. E. (2006). Does worry about breast cancer predict screening behaviors? A meta-analysis of the prospective evidence. Preventive Medicine, 42, 401-408.Google Scholar ↗

[refR-18] Jacobs, B. I., & Levy, K. N. (1996). Residual risk: How much is too much? Journal of Portfolio Management, 22, 10-16.Google Scholar ↗

[refR-19] Klein, W. M. P., Zajac, L. E., & Monin, M. M. (2009). Worry as a moderator of the association between risk perceptions and quitting intentions in young adult and adult smokers. Annals of Behavioral Medicine, 38, 256 -261.Google Scholar ↗

[refR-20] Koerner, N., & Dugas,M. J. (2007). An investigation of appraisals in individuals vulnerable to excessive worry: The role of intolerance of uncertainty. Cognitive Theory and Research, 32, 619-638.Google Scholar ↗

[refR-21] Ladouceur, R., Gosselin, P., & Dugas, M. J. (2000). Experimental manipulation of intolerance of uncertainty: A study of a theoretical model of worry. Behaviour Research and Therapy, 38, 933–941.Google Scholar ↗

[refR-22] Ladouceur, R., Talbot, F., & Dugas, M. J. (1997). Behavioral expressions of intolerance of uncertainty in worry. Behavior Modification, 21, 355–371.Google Scholar ↗

[refR-23] Markowitz, H. M. (1952). Portfolio selection. The Journal of Finance, 7, 77-91.Google Scholar ↗

[refR-24] Matthews, G. & Funke, G. J. (2007). Worry and information processing. In G. Davey & A. Wells (Eds.) Worry and its psychological disorders: Theory, assessment, and treatment (pp.51-67). Wiley & Sons Limited.Google Scholar ↗

[refR-25] Schirripa, F., & Tecotzky, N. D. (2000). An optimal frontier. Journal of Portfolio Management, 26, 29-40.Google Scholar ↗

[refR-26] Simons, K. (1999). Should US investors invest overseas? Federal Reserve Bank of Boston. Retrieved from http://www.bos.frb.org/economic/neer/neer1999/neer699b.pdf.Google Scholar ↗

[refR-27] Sitkin, S. B. & Pablo, L. R. (1992). Reconceptualizing the determinants of risk behaviour. Academy of Management Review, 17, 9-38.Google Scholar ↗

[refR-28] Weber, E.U., Blais, A., & Betz, N. E. (2002). A domain specific risk attitude scale: Measuring risk perceptions and risk behaviors. Journal of Behavioral Decision Making, 15, 263-290.Google Scholar ↗

[refR-29] Wells, A. & Matthews, G. (1994). Attention and emotion: A clinical perspective. Hove: Lawrence Erlbaum.Google Scholar ↗

[refR-30] Zeidner, M. (1998). Test anxiety: The state of the art. New York, NY: Plenum Press.Google Scholar ↗