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The IUP Journal of Applied Finance
Influence of Urgency on Financial Risk-Taking Behavior of Individual Investors: The Role of Financial Risk Tolerance as a Mediating Factor
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This paper empirically examines whether unobserved variable (urgency) is capable of influencing individual investors’ financial risk-taking behavior. It further aims to explore the causal relationship from urgency through financial risk tolerance to financial risk-taking behavior. Based on the review of previous studies, two conceptual frameworks (direct effect and indirect effect) followed by a set of hypotheses were developed. A survey was conducted among individual investors (N = 90) with various levels of investment experience, through a structured questionnaire followed by data analysis using Partial Least Squares-Structural Equation Modeling (PLS-SEM). The results were found to be significant when examined for both direct and causal pathways thereby suggesting the need for more research aimed at examining the effects of these unobserved variables on financial risk-taking behavior of individuals.

 
 
 

For centuries it has been identified that an individual’s psychological disposition influences his decision making in general and risk-taking behavior in particular (Schwarz and Clore, 1996; Bagozzi et al., 1999; Mellers et al., 1999; Lerner and Keltner, 2000; Luomala and Laaksonen, 2000; Lerner et al., 2004; Slovic et al., 2004; and Han et al., 2007). There is yet no consensus amongst the researchers regarding the role these psychological dispositions play in the way in which individuals exhibit financial-risk taking behavior (Clarke and Statman, 1998; Ackert et al., 2003; and Olson, 2006).

Researchers have been examining the influence of dispositions on the individual’s perception towards risk (Johnson and Tversky, 1983) and their risk-taking behavior (Hockey et al. 2000; and Hirshleifer and Shumway, 2003). They were of the opinion that both cognitive and affective states influence an individual’s risk-taking behavior (Schunk and Betsch, 2006; Townsend, 2006; and Wang, 2006); however, they were quite contradictory in their predictions while conceptualizing the role played by specific affective states, as results were inconsistent.

Although a large number of conceptual frameworks were based on behavioral observations (e.g., Prospect Theory, Regret Theory, Ellsberg’s Paradox, Satisficing Theory), risk-as-feelings hypothesis offered a fresh approach to understand both risk tolerance and risk-taking behaviors. The framework proposed by Loewenstein et al. (2001) combined both the rational and experiential systems and was based on the presumption that responses to risky situations (including decision making) result in part from direct emotional influences, suggesting that an individual assesses risky situation using both cognitive (based on subjective evaluation) and affective (based on disposing factors) processes. The framework was in consistent with the findings of Slovic et al. (2004) which stated that, “affect influences judgment directly and is not simply a response to a prior analytic evaluation”.

 
 
 

Applied Finance Journal,Partial Least Squares-Structural Equation Modeling (PLS-SEM), Influence of Urgency on Financial Risk-Taking, Behavior of Individual Investors, The Role of Financial Risk Tolerance.