The Paradoxical Behavioral Effects of a Directional Goal on Investors' Risk Perceptions and Valuation Judgments

Kristina Marie Rennekamp, Brian J. White, W Brooke Elliott

Research output: Contribution to journalArticle

Abstract

Market participants who evaluate risk often have a preference or goal for positive company performance. The authors test how such a directional goal affects risk perceptions and the relation between risk perceptions and assessments of value in an investment context. Compared with investors without directional goals—who, consistent with prior behavioral research, focus on negative aspects of risk—the authors find that those with directional goals assess risk as being more symmetric (i.e., they are less focused on downside risk). However, investors with directional goals are also less likely to consider risk when assessing value. Taken together, these results suggest that a directional goal reduces one behavioral effect identified in prior literature (the tendency to focus on downside risk), but creates another behavioral effect (ignoring risk in assessing value). The authors discuss implications for standard setters and regulators seeking to communicate risk information to market participants.
Original languageEnglish (US)
Pages (from-to)271-290
JournalJournal of Behavioral Finance
Volume19
Issue number3
DOIs
StatePublished - Jul 3 2018

Keywords

  • Directional goals
  • Risk perceptions
  • Valuation
  • Investors

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