A Test of the Relevant Association Between Utility Theory and Subjective Risk Tolerance: Introducing the Profit-to-Willingness Ratio
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.
Journal of Behavioral and Experimental Finance
DOI of Published Version
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.