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Variance and beta as perceived risk: questionable science

Variance and beta as perceived risk: questionable science Purpose – The purpose of this paper is to discuss the origin of variance and beta as risk measures and to identify their shortcomings as perceived risk metrics. Design/methodology/approach – The paper analyses seminal literature from economics, psychology, and neuroscience that have relevance to financial risk. Findings – There is empirical evidence that investors are loss‐averse and affectively influenced. Variance and beta as conventionally calculated are flawed because they do not take into account the inherent indeterminacy of the investor's world. Practical implications – The paper demonstrates that perceived risk will be systematically mis‐measured and that risk premium/return anomalies will prevail until a more affective and multidimensional risk metric is utilized. Originality/value – The value of the paper lies in its concise and clear identification of financial risk measurement issues and a suggested direction for remediation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Qualitative Research in Financial Markets Emerald Publishing

Variance and beta as perceived risk: questionable science

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References (63)

Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1755-4179
DOI
10.1108/17554170910975919
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to discuss the origin of variance and beta as risk measures and to identify their shortcomings as perceived risk metrics. Design/methodology/approach – The paper analyses seminal literature from economics, psychology, and neuroscience that have relevance to financial risk. Findings – There is empirical evidence that investors are loss‐averse and affectively influenced. Variance and beta as conventionally calculated are flawed because they do not take into account the inherent indeterminacy of the investor's world. Practical implications – The paper demonstrates that perceived risk will be systematically mis‐measured and that risk premium/return anomalies will prevail until a more affective and multidimensional risk metric is utilized. Originality/value – The value of the paper lies in its concise and clear identification of financial risk measurement issues and a suggested direction for remediation.

Journal

Qualitative Research in Financial MarketsEmerald Publishing

Published: Jun 5, 2009

Keywords: Financial risk; Risk analysis

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