THE IMPACT OF RISK ON THE STOCK EXCHANGE BEHAVIOUR
Risk is a permanent feature of the capital market, as it plays the main part on the stock exchange.
The work shows us the impact of risk on the behaviour of the stock exchange traders: ignoring correlations, prejudice of familiarity, national bias, local bias, employer’s prejudice and the emotional bias.
Investors are faced with the difficulty of assessing the risk of owning an asset for their income. They would rather take into account the inherent risk of assets, than to appreciate the change generated regarding the global risk of their securities. Investing will actually allow to adapt the income performances when they are on the rise, when the others fall, and the other way round. Revenue, taken as a whole, has to be optimal and to best reflect the preference of those who economise relatively to the risk. Even for someone who is very prudent, risky actions may be needed to get the best performance possible, taking into account the low risk level.
Prejudice of familiarity appears when an individual prefers an option to another one just on grounds of familiarity. Advertising effort has a stronger impact on the number of individual shareholders. Such a result confirms the ideea that private persons, more than professionnals, trust nonfinancial criteria such as familiarity to choose investments.
Investors exaggerate the weight of domestic shares in their income. Academic studies have shown that national titles are perceived by private persons as less risky than the foreign ones. The national prejudice generates an overexposure of securities to national risk, which could be reduced by geographic variation. (the USA, Europe, Japan, emerging markets).
The local prejudice determines the investors to give preeminence to shares of companies in their region.
The employer’s prejudice is the most dangerous consequence of the attraction for financial investments. It is characterized by an overconcentration of income of the investors into the titles of the hiring company. Employees build their trust in the capital of their company after the share has progressed. A strong ratio of investments by the employees in the company bonds doesn’t show sign of a strong future progress of shares.
The contrary relationship between the perceived risk and the perceived benefit of an activity is actually connected to the soundness of the negative or positive feeling associated to the respective activity. Individuals found their judgment not only on what they think, but also on what they feel. Il they like an activity, they are tempted to consider risks as minor, and gains as important. If they have a negative feeling, they tend to judge the opposite.
Although risk means that many things only may happen than they will actually do, a definition comprising the idea of volatility- this statement does not specify a time unit. Once the temporal dimension is introduced, the link between risk and volatility tends to weaken.
The risk is within us. If we over estimate our ability to really understand an investment or to come out clean after a dramatic price period, it doesn’t matter what our portfolio contains or what happens on the market. In the end, the financial risk does not lie in what types of investments have we done, but in what type of investor we are.
All these elements pertain to behavior finance and they show us that the investor is not reasonable most of the times when he/she makes a decision on the capital market and in relation to the risks undertaken on the stock exchange.