Investors’ Risk Aversion Preference from the Perspective of Behavioral Finance
Main Article Content
Keywords
behavioral finance, risk aversion preference, investment decision-making, market anomalies
Abstract
Behavioral finance breaks through the limitations of the “rational man” assumption in traditional financial theory, providing a more realistic perspective to explain irrational behaviors in the market (such as “herd behavior” and “disposition effect”) and abnormal phenomena like stock prices deviating from fundamentals. This discipline incorporates psychological factors such as cognitive biases and emotional fluctuations into its analytical framework, with investors’ risk-averse preferences being particularly crucial. These preferences directly influence their risk-return trade-offs and, through the aggregation effect of individual decisions, profoundly shape market volatility and operational efficiency. This paper systematically reviews the relevant theories and empirical studies on investor risk aversion preference in the field of behavioral finance, exploring the topic from multiple dimensions: at the level of influencing factors, it analyzes the effects of individual cognitive biases, emotional states, and market environments on risk aversion preferences; it also examines in depth how risk aversion affects investment decisions and the resulting market anomalies; finally, it investigates the behavioral finance explanations for fluctuations in risk aversion preferences, interpreting investors’ tendencies and changes in risk aversion from a behavioral finance perspective. The aim of this paper is to comprehensively analyze the significance and practical value of risk aversion preferences within the framework of behavioral finance, deepening the understanding of investors’ decision-making logic, and providing practical references for investors to optimize asset allocation and improve decision-making rationality, as well as for market participants to more accurately grasp market operating rules and maintain market stability.
References
- Arrow, K. J., (1965). Aspects of the theory of risk-bearing, Helsinki: Yrjö Jahnssonin Säätiö.
- Baker, M. and Wurgler, J., (2006). Investor sentiment and the cross‐section of stock returns. The journal of Finance, vol. 61, no. 4, pp. 1645-1680.
- Barber, B. M. and Odean, T., (2001). Boys will be boys: Gender, overconfidence, and common stock investment. The quarterly journal of economics, vol. 116, no. 1, pp. 261-292.
- Campbell, J. Y. and Cochrane, J. H., (1999). By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of political Economy, vol. 107, no. 2, pp. 205-251.
- Gervais, S. and Odean, T., (2001). Learning to be overconfident. The review of financial studies, vol. 14, no. 1, pp. 1-27.
- Kahneman, D. and Tversky, A., (1979). Prospect theory: An analysis of decision under risk. Econometrica, vol. 47, no. 2, pp. 263-291.
- Kumar, A., (2009). Who gambles in the stock market? The journal of finance, vol. 64, no. 4, pp. 1889-1933.
- Li, X. D., (2004). Behavioral Finance: Theory and Evidence from China, Shanghai: Shanghai Joint Publishing House.
- Markowitz, H., (1952). Portfolio selection. The Journal of Finance, vol. 75, no. 4, pp. 1673-1712.
- Mehra, R. and Prescott, E. C., (1985). The equity premium: A puzzle. Journal of monetary Economics, vol. 15, no. 2, pp. 145-161.
- Odean, T., (1998). Are investors reluctant to realize their losses? The Journal of finance, vol. 53, no. 5, pp. 1775-1798.
- Pratt, J. W., (1964). Risk aversion in the small and in the large. Econometrica, vol. 32, no. 1/2, pp. 122-136.
- Thaler, R., (1985). Mental accounting and consumer choice. Marketing science, vol. 4, no. 3, pp. 199-214.
- Yoo, C. and Alavi, M., (2005). Age, risk aversion, and portfolio choice. Journal of Banking & Finance, vol. 144, p. 105777.
Article Sidebar
This work is licensed under a Creative Commons Attribution 4.0 International License.