Determinants of the Risk-Taking Attitude among Small Equity Investors

Introduction

Risk is a difficult construct to define. The outcomes of risk depend on the situation and the decision maker. Risk assumption attitude involves participation in certain activities that might results in harm, loss or undesired outcomes (Ricciardi, 2004). Risk assumption attitude often referred as risk appetite, risk tolerance, risk acceptance and risk propensity is decision maker’s general disposition to a particular risk in a consistent way (Roskowzki and Davey 2010). Kahneman and Tversky (1979) also hold that individual investor tend to seek risk in loss realm and avoid risk in profit realm. Risk assumption attitude varies among different people depending their personality traits, personal control, behavioral factors, cultural factors and other socio-demographics including; age, gender, income level, financial needs, investment objectives, investment strategies. Slovic (1987) holds that the construct of risk means somewhat different among different people.

Identifying determinants of small investor’s risk attitude is an important part of research in behavioral finance. It provides better understanding of various factors that influence risk assumption attitude of individual equity investors. It enables investment professionals to offer customized financial services and investment instruments that best match the risk assumption attitude of individual equity investors. It also facilitates regulatory authorities to improve legislations while having better understanding of investors’ risk attitude.

The current study provides significant contribution by identifying the determinants of investor’s risky attitude in a developing country’s context. The study extends the model of investor’s risk assumption attitude proposed by Dulebohn (2002). The study introduced some new variables in the existing models of individual investor’s risk assumption behavior.