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Volatility Inadaptability: Investors Care About Risk, but Cannot Cope with Volatility

Author

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  • Christian Ehm
  • Christine Kaufmann
  • Martin Weber
Abstract
This article investigates two research questions: do investors see a relationship between risk attitude and the amount invested into risky assets? Further, do investors adjust their investments if provided with assets that have different volatilities? In an experimental study, investors allocate an amount between a risky and a risk-free asset. Investors’ risk attitude predicts risk taking. Investors are, however, unable to adapt to risky assets with different volatilities; they choose almost the same allocation to the risky asset independently of its volatility, thus amassing significantly different portfolios.

Suggested Citation

  • Christian Ehm & Christine Kaufmann & Martin Weber, 2014. "Volatility Inadaptability: Investors Care About Risk, but Cannot Cope with Volatility," Review of Finance, European Finance Association, vol. 18(4), pages 1387-1423.
    • Handle: RePEc:oup:revfin:v:18:y:2014:i:4:p:1387-1423.
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    File URL: http://hdl.handle.net/10.1093/rof/rft032
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