Risk tolerance and anchoring

CTIBOR PILCH

According to traditional financial theories, all financial market participants think and act rationally. Their preferences will immediately adapt to new information and will be based on maximization of benefit theory. This theory is logical, but fails when applied to real life. That is why, in response to the malfunction of the theory of efficient markets and rational behavior models, in practice, a new approach to explaining the behavior of financial market participants has been created, namely behavioral finance. Theories of Behavioral Finance say that some financial issues and phenomena can be better described and understood When we use models where subjects do not have to act rationally. According to this theory, there are many deviations from rationality. Some are described better, others less. Some are emotional-dependent, they are called emotional. Others, emotional-independent, are called cognitive. Two of them, one of each group, are analyzed in the present submission. These are Tolerance to Risk and Anchor Deviations. The results of a sample survey of 1,350 respondents by the contributor document the fact that the deviations exist despite age and education.

Keywords

Risk, risk tolerance, anchoring, cognitive deviations, emotional deviations

JEL classification

G21, G23

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