Financial Risk Tolerance Before and After a Stock Market Shock: Testing the Recency Bias Hypothesis

TY - JOUR

T1 - Financial Risk Tolerance Before and After a Stock Market Shock

T2 - Testing the Recency Bias Hypothesis

AU - Rabbani, Abed G.

AU - Grable, John E.

AU - O'Neill, Barbara

AU - Lawrence, Frances

AU - Yao, Zheying

N1 - Publisher Copyright: © Copyright 2021 Association for Financial Counseling and Planning Education, U.S.A.

PY - 2021

Y1 - 2021

N2 - Is there an association between a household financial decision maker's risk tolerance and the performance of the stock market? Some researchers argue that financial market events have little association with the financial risk tolerance (FRT) of household financial decision makers, while others argue that FRT among individuals can vary in relation to significant market fluctuations. The applicability of either argument may depend on the length of the period before and after a major market event. The purpose of this study was to evaluate aggregate changes in FRT around a major stock market event for different anchor time periods and to test the recency bias hypothesis. The analyses were designed to explore the FRT of Americans during a volatile multimonth period of stock market performance in 2018–2019. Several univariate, bivariate, and multivariate tests were used to compare FRT assessment scores pre- and post-October 3rd, 2018 (i.e., the market high in 2018). A decrease in FRT from the market high was noted across the sample; however, the decrease was exhibited most acutely by younger, nonmarried respondents with few investable assets. A noteworthy finding from this study is that financial counselors and financial planners likely serve a “buffering” role when household financial decision makers experience stock market shocks.

AB - Is there an association between a household financial decision maker's risk tolerance and the performance of the stock market? Some researchers argue that financial market events have little association with the financial risk tolerance (FRT) of household financial decision makers, while others argue that FRT among individuals can vary in relation to significant market fluctuations. The applicability of either argument may depend on the length of the period before and after a major market event. The purpose of this study was to evaluate aggregate changes in FRT around a major stock market event for different anchor time periods and to test the recency bias hypothesis. The analyses were designed to explore the FRT of Americans during a volatile multimonth period of stock market performance in 2018–2019. Several univariate, bivariate, and multivariate tests were used to compare FRT assessment scores pre- and post-October 3rd, 2018 (i.e., the market high in 2018). A decrease in FRT from the market high was noted across the sample; however, the decrease was exhibited most acutely by younger, nonmarried respondents with few investable assets. A noteworthy finding from this study is that financial counselors and financial planners likely serve a “buffering” role when household financial decision makers experience stock market shocks.

KW - financial planning

KW - investment

KW - portfolio

KW - recency bias

KW - risk tolerance

KW - stock market

UR - https://www.scopus.com/pages/publications/85115405168

UR - https://www.scopus.com/pages/publications/85115405168#tab=citedBy

U2 - 10.1891/JFCP-19-00025

DO - 10.1891/JFCP-19-00025

M3 - Article

SN - 1052-3073

VL - 32

SP - 294

EP - 310

JO - Journal of Financial Counseling and Planning

JF - Journal of Financial Counseling and Planning

IS - 2

ER -