Understanding and Assessing Financial Risk Tolerance: A Biological Perspective
W. V. Harlow
Keith C. Brown
Financial Analysts Journal 46, 1990, pp. 50-62
The determination of an investor’s tolerance for risk is a cornerstone of the asset allocation process. Yet the various ad hoc techniques currently employed to gauge risk tolerance lack a theoretical basis for individual differences in attitudes toward uncertainty. Our study provides empirical evidence supporting a theoretical link between financial risk tolerance and certain behavioral traits. It also provides indirect evidence for the notion of a ‘life-cycle’ of economic preferences (i.e., risk aversion increasing with age) and direct support for the usefulness of risk-tolerance assessment procedures that concentrate on investor-specific psychological profiles.
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