Individual investors’ sophistication and expectations of risk and return
ISSN: 1940-5979
Article publication date: 24 May 2019
Issue publication date: 24 May 2019
Abstract
Purpose
The purpose of this paper is to investigate the relationship between individual investors’ level of sophistication and their expectations of risk and return in the stock market.
Design/methodology/approach
The author combines survey and registry data on individual investors in Sweden to obtain 11 sophistication proxies that previous research has related to individuals’ financial decisions. These proxies are related to a survey measure regarding individual investors’ expectations of risk and return in an index fund using linear regressions.
Findings
The findings in this paper indicate that sophisticated investors have lower risk and higher return expectations that are closer to objective measures than those of less-sophisticated investors.
Originality/value
These results are important, since they enhance the understanding of the underlying mechanisms through which sophistication can influence financial decisions.
Keywords
Acknowledgements
The author gratefully acknowledges the financial support from the Wallander, Browald and Tom Hedelius Foundation. The author thanks Anders Anderson, Gerrit Antonides, Anders Carlander, Jörgen Hellström, Rickard Olsson, Amin Sofla and conference participants at the IAREP – SAREP – ICABEEP joint conference 2015 for their useful comments on an earlier version of the paper.
Citation
Stålnacke, O. (2019), "Individual investors’ sophistication and expectations of risk and return", Review of Behavioral Finance, Vol. 11 No. 1, pp. 2-22. https://doi.org/10.1108/RBF-08-2017-0087
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited