How Do Investors Judge the Risk of Financial Items?
These include a decision-theory model, which relies on analyzing outcomes and probabilities, and a behavioral model based on psychology research by Paul Slovic. Two studies were conducted on selected groups of investors to discover which model proved a more reliable explanation of investors’ risk assessments. The paper’s results show that combining the best of each model more accurately explains why investors judge particular endeavors as riskier than others. “We asked which risk model prevails when it comes to financial instruments and stock markets and derivatives,” McAnally said. “We really thought the decision/theoretic would prevail because we’re trained as accountants to be analytical. But, it turns out that neither of those models alone is as good as a combined model.” This research ties into previous risk-assessment research, but is groundbreaking in its attempt to unravel the psychology behind the field of risk and investment. The work combines different accounting research te
