Risk tolerance and behavioral attitudes : a case study of Lebanese institutional investors

Abstract

Purpose: This research identifies the determinants of the investment risk tolerance of the Lebanese institutional investors and investigates whether the behavioral conduct and the investment personal risk tolerance of the Lebanese institutional investors vary with respect to their demographic characteristics and profiles and other chosen variables. This paper also tries to identify the characteristics that make an investor rational in the decision –making. Design/ methodology/ approach: Deductive in nature, this research uses questionnaires collected from 129 Lebanese institutional investors to test three hypotheses related to their risk profile and their investment behavior. Findings: The findings provide evidence of a positive significant relationship between personal risk tolerance and optimism. Moreover, results reveal that male investors are more risk tolerant than female ones, whereas the results show a positive significant relationship between hindsight bias and risk tolerance. In addition, finding suggest that framing bias increases the likelihood for the investor to be classified as novice investor, while framing and cognitive dissonance biases increase the likelihood of investors to be categorized less rational in their investment decisions. Finally, no variability was found in risk tolerance, overconfidence, and other biases with respect to the investor type and rationality. Research limitations/ implications: Further factors such as personal traits, financial conditions, and life experiences would play an important role in determining the risk of tolerance and behavior of the investors but Lebanese investors refuse to reveal such confidential information. On the research level, this paper adds to the small number of studies addressing the behavioral biases and risk tolerance of the investors in the MENA region. Practical implications: At the practical level, this research attempts to inform the Lebanese institutional investors on the factors that affect their investments decisions which could result in more knowledge about behavior biases and contribute to a better investment decision- making process. Originality/ value: Studies related to behavioral finance and risk tolerance have generally been conducted in countries with active financial and stock markets. This research tests the traditional finance theories and the behavioral theories in a developing market and shows that the Lebanese investors exhibit bounded rationality.