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Appears in Collections:Economics Journal Articles
Peer Review Status: Refereed
Title: Downside financial risk is misunderstood
Author(s): Newall, Philip W S
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Keywords: financial risk
downside risk
financial literacy
Issue Date: Sep-2016
Citation: Newall PWS (2016) Downside financial risk is misunderstood, Judgement and Decision Making, 11 (5), pp. 416-423.
Abstract: 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.
Rights: Copyright: © 2016. The authors license this article under the terms of the Creative Commons Attribution 3.0 License

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