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Target return as efficient driver of risk-taking

Author

Listed:
  • D’Hondt, Catherine

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • De Winne, Rudy

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Todorovic, Aleksandar

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

Abstract
Purpose – This paper examines whether target returns act as specific goals that impact risk-taking when individuals make investment decisions. Design/methodology/approach – Using an experimental setting, the authors assign either a low or a high target return to participants and ask them to make independent investment decisions as the risk-free rate fluctuates around their target return and, for some of them, becomes negative. Findings – Building on cumulative prospect theory, the authors find that the prevailing reference point of participants is the target return, regardless of the level of the risk-free rate. This result still holds even when the risk-free rate is negative, suggesting that (1) the target return drives risk-taking more than does a zero-threshold and (2) negative rates are limited as a tool to stimulate appetites for risk. In a follow-up study, the authors show that these conclusions remain valid when the target return is endogenously determined. Originality/value – The authors’ original approach, which pioneers the use of target returns in both the positive and negative interest rate contexts, provides insightful results about the “reach for yield” among regular people.

Suggested Citation

  • D’Hondt, Catherine & De Winne, Rudy & Todorovic, Aleksandar, 2023. "Target return as efficient driver of risk-taking," LIDAM Reprints LFIN 2023014, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2023014
    DOI: https://doi.org/10.1108/RBF-09-2022-0216
    Note: In: Review of Behavioral Finance, 2023
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    Keywords

    Risk-taking ; Target return ; Reference point ; Negative interest rates;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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