1 Prof. Martin Weber UNIVERSITÄT MANNHEIM October 10, 2008 Martin Weber University of Mannheim Risk...
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Transcript of 1 Prof. Martin Weber UNIVERSITÄT MANNHEIM October 10, 2008 Martin Weber University of Mannheim Risk...
1Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Martin Weber
University of Mannheim
Risk Taking
2Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Motivation
(MiFID, 2006/73)
Markets in Financial Instruments Directive - MiFID
Investment firms need to make sure that an investment
meets the investment objectives of the client in question
and is suitable for him (MiFID, 2004/39)
What are investment objectives?
• “…information on the length of time for which the client wishes to
hold the investment,
• his preferences regarding risk taking,
• his risk profile
• and the purposes of the investment.”
3Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Motivation
• Legal necessity
• Marketing strategy
- Fill out form and file
- Fill out form and use for advisory
- Fill out form online and use at discount brokers
Reasons to know more about your customer
4Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Elicitation of “preferences regarding risk taking” and “risk profiles”
Motivation
SOEP (2008) (Socio-Economic-Panel of the DIW)
(approx. 22,000 individuals)
5Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Motivation
SOEP (2004) (Socio-Economic-Panel of the DIW)
Elicitation of “preferences regarding risk taking” and “risk profiles”
6Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Motivation
Some German Bank (Private Wealth Management)
Elicitation of “preferences regarding risk taking” and “risk profiles”
7Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Modeling Risk Taking
Risk Taking (Investing) = f ( Return, Risk)
≙ (Perceived Return) – (Risk Attitude) (Risk Perception)(Investing)
Risk Taking
(see e.g Markowitz, JF, 1952)
(see e.g Sarin/Weber, EJOR, 1993, Jia et al., MS, 1999 and E. Weber et al., 2004, JBDM)
8Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Modeling Risk Taking
RiskTaking
PerceivedReturn≙ Risk
Attitude- . PerceivedRisk
How is this link affected by:
• Different domains of risk taking?
• Different ways of measuring risk attitudes?
• Different ways of measuring perceived risk/return?
• Subjects level of overconfidence?
Analyze this link in a questionnaire study with 78 students(Nosic/Weber, How Risky Do I Invest: The Role of Risk Attitudes, Risk Perceptions and Overconfidence, 2008)
9Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Design: Risk Taking
50%
50% +9.000 Euro
+12.000 Euro
+10.000 Euro
10
20
30
40
50
60
Nov. 01 Nov. 02 Nov. 03 Nov. 04 Nov. 05 Nov. 06
TakingPerceived
Return≙ RiskAttitude- . Perceived
RiskRisk
(State certainty equivalent)Lottery 2 Risk taking
50%
50% 0 Euro
10.000 Euro
Stocks(Divide 10,000 Euros between a lottery and a risk free asset repeat for 5 different stocks)
Risk taking
(Divide 10,000 Euros between a lottery and a risk free asset)
Lottery 1 Risk taking
10Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Design: Risk Taking
50%
50% +9.000 Euro
+12.000 Euro
+10.000 Euro
10
20
30
40
50
60
Nov. 01 Nov. 02 Nov. 03 Nov. 04 Nov. 05 Nov. 06
TakingPerceived
Return≙ RiskAttitude- . Perceived
RiskRisk
Lottery 2
50%
50% 0 Euro
10.000 Euro
Stocks
Lottery 1 Mean = 58.75% (Median = 60%)
75% of all subjects in range: (40% - 100%)
Mean = 4144.73 (Median = 4000)
83% of all subjects in range: (3000 - 5000)
Mean Avg. stocks = 43.64% (Median Avg. stocks = 40%)
75% of all subjects in range: (28% - 100%)
11Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Design: Perceived Return
Historical Return Past return of each stock
Expected Return (Stock) State expected price for each stock (and transform this into return estimates)
RiskTaking Return
RiskAttitude
. PerceivedRisk
Perceived -≙
10
20
30
40
50
60
Nov. 01 Nov. 02 Nov. 03 Nov. 04 Nov. 05 Nov. 06
12Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Design: Risk Attitude
1 low willingness to take risk≙ …. 5 high willingness to take risk≙
Subjective Risk Attitude
RiskTaking
PerceivedReturn≙
Attitude- . Perceived
RiskRisk
Mean = 2.59 (Median = 2.5)
91% of all subjects in range: (2 - 4)
Risk Attitude (Lottery 2)
50%
50% 0 Euro
10.000 Euro (elicit certainty equivalent and transform it into risk aversion parameters u(x) = xα)
Mean = 0.86 (Median = 0.76)
83% of all subjects in range: (0.58 - 1)
13Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Design: Perceived Risk
Historical Volatility Past volatility of each stock
Risk perception State risk perception on Likert scale • Lottery 1 (Mean = 4.1)• Lottery 2 (Mean = 7.11)• Each stock individually (Mean = 5.43)
Expected Volatility (Stock)State upper/lower bound for each stock (and transform this into volatility estimates)
RiskTaking
PerceivedReturn≙ Risk
Attitude- .Risk
Perceived
14Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Results: Correlation analyses
First evidence for domain specificity
Subjective risk attitude is better & more general predictor of risk taking behavior
(Expected Return – Historical Return)
Expected VolatilityHistorical Volatility
Risk Taking (Lottery 1) Risk Taking (Lottery 2) Risk Taking (Stocks)
Subjective Risk Attitude 0.427 0.445 0.350(0.000)*** (0.000)*** (0.000)***
Risk Perception (Lottery 1) -0.460 -0.313 -0.008(0.000)*** (0.006)*** (0.949)
Risk Perception (Lottery 2) -0.329 -0.504 -0.023(0.004)*** (0.000)*** (0.847)
Risk Attitude (Lottery 2) 0.359 0.034(0.002)*** (0.770)
Mean Optimism (Stocks) 0.001 0.130 0.046(0.990) (0.263) (0.692)
Mean Miscalibration (Stocks) -0.083 -0.129 -0.256(0.476) (0.266) (0.025)**
15Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Results: Disggregated regressions (clustered OLS)
Domain specificity
More overconfident take more risk
Subjective risk attitude vs. lotteries
Subjective vs. objective risk/return
Risk taking (stocks)Subjective Risk Attitude 10.087 9.514 9.225 9.236
(0.000)*** (0.001)*** (0.003)*** (0.003)***Risk Perception (Lottery 1) 0.297 0.226
(0.826) (0.866)Risk Perception (Lottery 2) -0.218 -0.231
(0.874) (0.866)Risk Attitude (Lottery 2) -0.730 -0.291
(0.905) (0.962)Historical Return (Stocks) 2.569 4.339
(0.654) (0.387)Historical Volatility (Stocks) -50.558 -30.484
(0.004)*** (0.119)Expected Return (Stock) 24.622 30.851
(0.018)** (0.004)***Optimism (Stocks) 33.690
(0.001)***Risk Perception (Stocks) -3.723 -3.398 -3.280
(0.000)*** (0.002)*** (0.003)***Expected Volatility (Stock) -26.530 -28.292
(0.003)*** (0.007)***Miscalibration (Stocks) 11.215
(0.003)***Controls No No Yes Yes
Stock Dummies No No No Yes
Constant 34.449 46.521 30.057 1.409(0.000)*** (0.000)*** (0.418) (0.969)
Observations 380 377 352 352Adjusted R-squared 0.136 0.260 0.262 0.271
16Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Conclusion
Historical Return
Expected Return
Subjective Risk Attitude
Risk Attitude Lottery 2
Risk Taking is a function of risk and return! However:
• Domain specificity is important
• Subjective risk/return measures are better predictors than historical risk/return
• Subjective risk attitudes are more adequate than lotteries
• More overconfident more risk taking
RiskTaking
PerceivedReturn
≙ - . PerceivedRisk
RiskAttitude
Historical Volatility
Expected Volatility
Risk Per-ception
17Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Outlook
• How to elicit risk attitudes
- Single, subjective score
- More complex psychometrically validated methods (self-assessments)
- Computerized, graphical approaches (see e.g. Goldstein et al., Journal of Consumer Research, 2008 or the following tool)
• How often to elicit determinants of risk taking?
- Changes in perceived return
- Changes in risk attitudes
- Changes in perceived risk