The Influence of Different Investment Horizons on Risk Behavior

Abstract

For longer investment periods, investment consultants usually recommend a larger proportion of risky assets for investor portfolios. We examine the effect of different investment horizons on investors' risk behavior. We are interested both in participants' risk perceptions and in their asset allocation behavior. We find significant underestimations of long-term risks, which lead to a higher proportion of risky assets in the long-term portfolios. Our data show that the belief in mean reversion is a potential explanation for this behavior.

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