Investment risk – The perspective of individual investors

• Published in: Journal of economic psychology 2012-06, Vol.33 (3), p.437-447
• Main Authors: Sachse, Katharina, Jungermann, Helmut, Belting, Julia M.
• Format: Article
• Language: English
• Subjects: Applied psychology; Biological and medical sciences; Discriminant analysis; Economic psychology; Financial literacy; Fundamental and applied biological sciences. Psychology; Germany; Individual investors; Investment decision; Investment decisions; Investment products; Investment risk perception; Investors; Liquidity; Loss; Miscellaneous; Perceived risk; Perception; Perceptions; Psychology. Psychoanalysis. Psychiatry; Psychology. Psychophysiology; Risk; Risk assessment; Savings and investment; Stocks; Studies
• ISSN: 0167-4870; 1872-7719
• DOI: 10.1016/j.joep.2011.12.006

► We report a psychometric study on lay investors’ investment risk perception. ► Perceived risk is predicted by quantitative and qualitative aspects. ► Gender and age do not influence perceived investment risk. ► The higher the financial literacy the lower the perceived risk. The aim of the research presented in this paper is to investigate the perceived investment risk of lay investors. Two surveys were conducted to examine the financial risk perception of German individual investors (N=119 in study 1; N=171 in study 2). Participants were asked to rate the risk and several aspects of different types of investment products (e.g. shares and bank savings books). Study 1 analyzed the specificity of risk perception of various common investment products. Separate regression analyses showed only minor differences in the composition of the risk perception models between the types of investment. A factor analysis revealed two dimensions of perceived investment risk, where one factor consists of aspects of loss and variability (factor risk), while the other comprises aspects of transparency and liquidity (factor manageability). The dimensions were used to classify the types of investment with regard to perceived risk. Study 2 focused on effects of individual characteristics on financial risk perception. Only financial literacy (measured by means of a knowledge test) proved to be relevant in a regression analysis where perceived investment risk was explained by using gender, age, investment experience, and financial literacy as predictors. Implications for an appropriate investment risk communication in financial consultancy were derived from the results.