Title
A Test of the Relevant Association Between Utility Theory and Subjective Risk Tolerance: Introducing the Profit-to-Willingness Ratio
Document Type
Article
Publication Date
9-2018
Abstract
The purpose of this study was to document the empirical linkage between an objective risk tolerance utility function and a subjective risk tolerance scale. This study utilized return data from 2008 through 2013 for the S&P 500 as a proxy for the objective risk tolerance utility function and risk tolerance data obtained from a multidimensional psychometrically designed financial risk tolerance scale. Results from this study add to the literature by introducing the Profit-to-Willingness ratio (P/W ratio) and by showing investments in the stock market exhibit strong associates with the risk attitudes and preferences of investors. It was determined that an increase in the S&P 500 was associated with a decrease in aggregate risk tolerance during the period of analysis, whereas a decrease in the index increased willingness to take financial risk during the same period.
Publication Title
Journal of Behavioral and Experimental Finance
Volume
19
First Page
84
Last Page
89
DOI of Published Version
10.1016/j.jbef.2018.05.003
Recommended Citation
Heo, Wookjae; Grable, John E.; and Rabbani, Abed G., "A Test of the Relevant Association Between Utility Theory and Subjective Risk Tolerance: Introducing the Profit-to-Willingness Ratio" (2018). Consumer Sciences Faculty Publications. 14.
https://openprairie.sdstate.edu/consumer-sci_pubs/14