martin weber university of mannheim
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Risk Taking. Martin Weber University of Mannheim. Motivation. Markets in Financial Instruments Directive - MiFID - PowerPoint PPT PresentationTRANSCRIPT
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1Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Martin Weber
University of Mannheim
Risk Taking
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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.”
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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
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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)
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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”
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6Prof. Martin WeberUNIVERSITÄT
MANNHEIM October 10, 2008
Motivation
Some German Bank (Private Wealth Management)
Elicitation of “preferences regarding risk taking” and “risk profiles”
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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)
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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)
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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
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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%)
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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
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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)
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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
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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)**
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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
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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≙ - . Perceived
RiskRisk
Attitude
Historical Volatility
Expected Volatility
Risk Per-ception
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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