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2011 | OriginalPaper | Chapter

4. Financial Risk Perceptions: A Behavioral Perspective

Author : Robert A. Olsen

Published in: Advances in Entrepreneurial Finance

Publisher: Springer New York

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Abstract

The generally accepted financial risk metrics, such as variance and Beta, are axiomatic mathematical constructions. They have mathematical validity but can be questioned on behavioral grounds. This chapter suggests a broader alternative approach. First, perception involves experiential content acquired as a result of human/world interaction. It is not merely the product of a passive internal “brain process.” Second, financial risk is hypothesized to be primarily a perception of potential loss as fabricated by an evolutionary dual decision-making process that embraces both affect and formal cognitive analysis. Thus of necessity, perceptions of risk contain both cognitive and affective attributes. Because man is by nature a social creature, perceived risk also entails risk attributes that manifest group concerns. These hypotheses are supported by a comprehensive literature review. Evidence is presented suggesting that this alternative perspective parsimoniously explains many current “risk/return” market anomalies.

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previous chapter Beyond Agency Theory: Value Creation and the Role of Cognition in the Relationship Between Entrepreneurs and Venture Capitalists
next chapter Contribution of Neuroscience to Financial Decision-Making
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Metadata
Title
Financial Risk Perceptions: A Behavioral Perspective
Author
Robert A. Olsen
Copyright Year
2011
Publisher
Springer New York
Book
Advances in Entrepreneurial Finance

Print ISBN: 978-1-4419-7526-3

Electronic ISBN: 978-1-4419-7527-0

Copyright Year: 2011

DOI
https://doi.org/10.1007/978-1-4419-7527-0_4