Do Individual Investors Bite Off More Than They Can Chew?
32 Pages Posted: 19 Jun 2020 Last revised: 22 Jun 2020
Date Written: May 26, 2020
Surveys worldwide indicate that return expectations of individual investors are often high. This paper investigates the determinants of individual target returns and the capacity of investors to reach their expectations. Using trading records and matched survey data for 4,140 retail investors, we show that investor target returns are mainly driven by subjective financial literacy and subjective risk tolerance, as well as some socio-demographics (age and education). Investors with higher target returns and investors with the highest subjective risk tolerance are less able to reach their targets. Although high financial literacy and high risk tolerance are strong drivers of investor ambition, they do not guarantee better success.
Keywords: Target returns, Financial risk tolerance, Financial literacy, Individual investors
JEL Classification: G11, G40
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