Risk preferences of individual investors: The role of dispositional tendencies and market trends

What is it about?

An Internet study was conducted to test perceived risk and actual risk preferences in bear and bull markets, controlling for sensation seeking. Small private investors (N=292), evaluated the riskiness of 4 portfolios that differed in expected return and variance and then chose one of the 4 portfolio. One group of investors (N=143) made choices in bear markets, and the other (N=149) made choices in bull markets. Risk perception was measured in 0–100-response scale, and individual differences in sensation seeking were measured using the Zuckerman, Eysenck, and Eysenck (1978) scale. Sensation seeking negatively correlated with perceived risk in bull markets but not in bear markets. The perceived riskiness of portfolios was similar in both market conditions, but those who made decisions in bull markets chose more risky portfolios. Sensation seeking positively correlated with preference for risky portfolios in both market conditions.

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