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Socio demographic factors determining attitudes to

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Socio-demographic factors determining attitudes to financial risk takingRisk attitude refers to the willingness of someone to take risks. Some people might prefer to takemore risks due to their higher risk tolerance or attraction to risk whereas other people exhibit riskS. 6
avoidance. However, both groups are aware of possible risks and can estimate them. The riskperception, on the other hand, is determined by the way a person subjectively estimates and “feels”about risk; people with a higher risk perception might think that they take less risks than they actuallydo.Differences among individuals in risk attitudes and risk perceptions can be explained by psychologicaland socio-demographic factors.Some factors such as gender, age, wealth/income, education,personal experiences and attitudes to homeownership seem to be particularly important. Still, itshould be noticed that the results of different studies sometimes contradict each other and dependvery much on the chosen methodology.Gender:Several studies indicate that women often perceive a situation riskier than men andare therefore inclined to take less risks. Furthermore, they are often more cautious than men.This combination of risk perception and the intention to take less risks should make womenmore risk averse than men. The significance of this gender effect, however, is very muchdisputed. When comparing gender with other demographic factors, some studies find noneor only a minor impact on risk tolerance, while others see gender as one of the mainexplanatory power among the demographic factors.Age:A general belief is that older people have less time to recover from potential losses andtherefore are inclined to make less risky investments. Some studies supported this argument,while others could not find any significant relationship between age and investor risk taking.Some authors even found that older people on average make riskier investments thanyounger ones. This led to the view, that risk tolerance is a concave function of age: risktolerance first increases with age but decreases after a certain age is reached. However, atwhich age the risk tolerance decreases is still debated. Furthermore, a deeper look on theresults also show, that the risk attitude of older people is more heterogeneous than for otherage groups. While some elders become very risk averse, others take more risk.Wealth/Income:People who have a high income or who are wealthier can invest in riskierassets, because the consequences of a loss are less problematic. Furthermore, wealth can bethe result of investing in risky investments with high returns. Therefore, people with a higherincome or who are wealthier, should be more risk tolerant than people with low income orwealth. While this view is confirmed by most studies in general, some authors find that risktolerance can decrease for very wealthy or high-income earners. If they surpass a certainlevel, they seem to be more concerned protecting their wealth rather than increasing it.

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Term
Fall
Professor
NoProfessor
Tags
risk manager

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