1) The document discusses factors that influence individual risk taking behavior in investments, including perceived return, perceived risk, and risk attitude. 2) An study of 78 students found that risk taking is influenced by subjective risk/return perceptions more than historical data, and subjective risk attitudes predict behavior better than lottery tasks. 3) More overconfident individuals tend to take more risks with their investments. The relationships between risk taking determinants can vary based on the specific domain or asset class.

1. Martin Weber University of Mannheim Risk Taking

4. Elicitation of “preferences regarding risk taking” and “risk profiles” Motivation SOEP (2008) (Socio-Economic-Panel of the DIW) (approx. 22,000 individuals)

5. Motivation SOEP (2004) (Socio-Economic-Panel of the DIW) Elicitation of “preferences regarding risk taking” and “risk profiles”

6. Motivation Some German Bank (Private Wealth Management) Elicitation of “preferences regarding risk taking” and “risk profiles”

7. Modeling Risk Taking Risk Taking (Investing) = f ( Return, Risk) (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) ≙ (Perceived Return) – (Risk Attitude) (Risk Perception) (Investing) Risk Taking

9. Design: Risk Taking (State certainty equivalent) Lottery 2 Risk taking 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

10. Design: Risk Taking Lottery 2 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%)

11. 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)

12. Design: Risk Attitude 1 ≙ low willingness to take risk …. 5 ≙ high willingness to take risk Subjective Risk Attitude Mean = 2.59 (Median = 2.5) 91% of all subjects in range: (2 - 4) Risk Attitude (Lottery 2) (elicit certainty equivalent and transform it into risk aversion parameters  u(x) = x α ) Mean = 0.86 (Median = 0.76) 83% of all subjects in range: (0.58 - 1)

14. 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 Volatility Historical Volatility

15. 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)