THE RISK PREFERENCES OF INDIVIDUAL INVESTORS

Abstract

Risk preferences of individual investors are studied by asking experimental questions to 2,226 members of a consumer panel. We find that most investors use more than one risk measure. For those investors who systematically choose one risk measure, semi-variance is most popular. Stock investors have a preference for semi-variance as a risk measure, while bond investors favor probability of loss. Investors state that they consider the original investment to be the most important benchmark, followed by the risk-free rate of return, and the market return. However, their choices in the experiment reveal that the market return is the most important benchmark.

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