Downside financial risk is misunderstood
The mathematics of downside financial risk can be difficult to understand: For example a 50% loss requires a subsequent 100% gain to break-even. A given percentage loss always requires a greater percentage gain to break-even. Instead, many non-expert investors may assume for example that a 50% gain...
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| Format: | Article |
| Language: | English |
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Cambridge University Press
2016-09-01
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| Series: | Judgment and Decision Making |
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| Online Access: | https://www.cambridge.org/core/product/identifier/S1930297500004526/type/journal_article |
| _version_ | 1797695982638465024 |
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| author | Philip W. S. Newall |
| author_facet | Philip W. S. Newall |
| author_sort | Philip W. S. Newall |
| collection | DOAJ |
| description | The mathematics of downside financial risk can be difficult to understand: For example a 50% loss requires a subsequent 100% gain to break-even. A given percentage loss always requires a greater percentage gain to break-even. Instead, many non-expert investors may assume for example that a 50% gain is sufficient to offset a 50% loss. Over 3,498 participants and five experiments, the widespread illusion that a sequence of equal percentage gains and losses produces a zero overall return was demonstrated. Participants continued to err frequently, even with percentage returns of +/-100%, or when financially incentivized. Financial literacy, numeracy, and deliberation were all shown to independently contribute to accurate performance. These results have implications for promoting the understanding of downside financial risk. |
| first_indexed | 2024-03-12T03:20:05Z |
| format | Article |
| id | doaj.art-52f2f7e12eda4311852f76958f68bc84 |
| institution | Directory Open Access Journal |
| issn | 1930-2975 |
| language | English |
| last_indexed | 2024-03-12T03:20:05Z |
| publishDate | 2016-09-01 |
| publisher | Cambridge University Press |
| record_format | Article |
| series | Judgment and Decision Making |
| spelling | doaj.art-52f2f7e12eda4311852f76958f68bc842023-09-03T14:02:35ZengCambridge University PressJudgment and Decision Making1930-29752016-09-011141642310.1017/S1930297500004526Downside financial risk is misunderstoodPhilip W. S. Newall0Behavioural Science Centre, Stirling Management School, University of Stirling, Stirling, FK9 4LA, U.K.The mathematics of downside financial risk can be difficult to understand: For example a 50% loss requires a subsequent 100% gain to break-even. A given percentage loss always requires a greater percentage gain to break-even. Instead, many non-expert investors may assume for example that a 50% gain is sufficient to offset a 50% loss. Over 3,498 participants and five experiments, the widespread illusion that a sequence of equal percentage gains and losses produces a zero overall return was demonstrated. Participants continued to err frequently, even with percentage returns of +/-100%, or when financially incentivized. Financial literacy, numeracy, and deliberation were all shown to independently contribute to accurate performance. These results have implications for promoting the understanding of downside financial risk.https://www.cambridge.org/core/product/identifier/S1930297500004526/type/journal_articlefinancial riskdownside risknumeracypercentagesfinancial literacydeliberation |
| spellingShingle | Philip W. S. Newall Downside financial risk is misunderstood Judgment and Decision Making financial risk downside risk numeracy percentages financial literacy deliberation |
| title | Downside financial risk is misunderstood |
| title_full | Downside financial risk is misunderstood |
| title_fullStr | Downside financial risk is misunderstood |
| title_full_unstemmed | Downside financial risk is misunderstood |
| title_short | Downside financial risk is misunderstood |
| title_sort | downside financial risk is misunderstood |
| topic | financial risk downside risk numeracy percentages financial literacy deliberation |
| url | https://www.cambridge.org/core/product/identifier/S1930297500004526/type/journal_article |
| work_keys_str_mv | AT philipwsnewall downsidefinancialriskismisunderstood |