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Risk Tolerance, Projection Bias, Vividness, and Equity Prices

John Grable, Ruth H. Lytton, Barbara O'Neill, So-Hyun Joo and Derek Klock
The Journal of Investing Summer 2006, 15 (2) 68-74; DOI: https://doi.org/10.3905/joi.2006.635632
John Grable
The director of the undergraduate and graduate financial planning programs at Kansas State University.
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  • For correspondence: grable@humec.ksu.edu
Ruth H. Lytton
The director of the undergraduate family financial management program at the Virginia Polytechnic Institute and State University.
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  • For correspondence: rlytton@mail.vt.edu
Barbara O'Neill
A professor and extension specialist in financial resource management at Rutgers University, New Brunswick, NJ.
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  • For correspondence: oneill@aesop.rutgers.edu
So-Hyun Joo
An associate professor at Texas Tech University.
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  • For correspondence: so-hyun.joo@ttu.edu
Derek Klock
An instructor of finance at Virginia Polytechnic Institute and State University and at Hollins University.
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  • For correspondence: ddklock@vt.edu
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Abstract

This article examines two hypotheses. First, investor risk tolerance fluctuates in part due to changes in the investment markets, and, second, investors tend to project stock market closing price data into the formation of risk-tolerance attitudes. Regression tests were conducted to determine the role of projection bias and vividness in the formation of risk attitudes among a convenience sample of internet survey respondents (N = 1,355). It was found that individuals who own securities tend to use recent and vivid stock market data when establishing risk attitudes. Further, risk attitudes, on average and in the aggregate, were found to fluctuate based on closing stock prices the previous week. Financial planners are cautioned that risk tolerance should not be used as a static input within asset allocation models.

TOPICS: Factors, risk premia, analysis of individual factors/risk premia

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Risk Tolerance, Projection Bias, Vividness, and Equity Prices
John Grable, Ruth H. Lytton, Barbara O'Neill, So-Hyun Joo, Derek Klock
The Journal of Investing May 2006, 15 (2) 68-74; DOI: 10.3905/joi.2006.635632

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Risk Tolerance, Projection Bias, Vividness, and Equity Prices
John Grable, Ruth H. Lytton, Barbara O'Neill, So-Hyun Joo, Derek Klock
The Journal of Investing May 2006, 15 (2) 68-74; DOI: 10.3905/joi.2006.635632
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