The impact of financial risk tolerance on investment decisions
Given the instability of the environment and the increasing changes in society and unexpected events, risk has always existed and has been one of the main and important aspects in the survival of human life cycles, especially in management. Managers must always identify the risks that threaten the company or stocks in order to be able to make appropriate and targeted decisions. Correct decisions require timely planning. The growth and prosperity of each country depends on appropriate investment and planning, and the increasing volume of investment in each country will include the correct direction of monetary flows and stray funds towards productive activities, economic growth, increasing gross national product, creating employment, increasing per capita income and ultimately public welfare.
The subject of financial behavior has been the most important financial discussion in the last two decades, and the attention of financial and economic researchers to this field is increasing. In this area, the concepts of financial economics and psychology are integrated in order to create more accurate models of human behavior in financial markets. Financial scholars, who have always sought to understand and explain the behaviors and causes of financial market events, have tried to explain the behavior of financial market decision-makers with the help of behavioral sciences. The dominant paradigm in financial theories is based on maximizing expected utility and risk aversion; while empirical studies from the real world have made numerous attacks in recent years on modern financial theories and the assumption of rational humans. Psychologists' studies show that humans in practice behave differently from what modern financial theories portray as rational humans. Discussing the behavior of investors in financial markets and understanding the causes and reasons for their behavior in these markets is a topic that has attracted the attention of scientists in recent years. In the meantime, many findings show that investors' decision-making and behavior are based on their specific characteristics, and the specific characteristics of each individual are an important factor in their decision-making.
The problem of decision-making with risk is one of the greatest problems that every human being deals with in life. Every decision is potentially accompanied by positive and negative consequences, and choosing the best option is the most important issue in the decision-making problem. Since humans may not act completely rationally in their decisions, there is a possibility of suffering losses as a result of a wrong decision. Recent studies and research in the field of behavioral finance have shown that investors may not be aware of these wrong decisions and the effective factors that cause these mistakes. Many factors affect risk: one of the most important is the characteristics of customers. If they are regular customers, investors usually have certain characteristics that have been able to exert such an influence on their customers. Investors can widely benefit from the applications of financial knowledge in their specific situations. As behavioral finance develops among market participants, investors will see its benefits, and it is expected that understanding how investor psychology influences investment outcomes will provide new insights. The expected outcome of properly communicating behavioral finance to managers and advisors is a portfolio that an advisor can create tailored to each investor’s goals and preferences. Advisors often use financial projects as a tool to influence clients and how to achieve personal financial goals with a low or zero risk approach. The results of this study provide a tool that may help advisors be aware of the potential consequences and opportunities associated with risky investment portfolios when advising. Research shows that those who do not tolerate risk have low financial intelligence, wealth, and financial management skills, while these individuals may certainly need the services of financial advisors. Investors with poor financial intelligence and poor financial management skills may avoid investing in risky and complex projects. Increasing financial intelligence and skills can help both increase consumer profits and identify problems caused by the multitude of investments available in the market.
Decision-making about risk and in risky situations is one of the most important parts of investment decisions; therefore, it is essential to recognize and examine the factors that affect and influence such decisions. Research in the field of behavioral finance shows that under conditions of uncertainty, human decisions systematically deviate from those predicted by financial and economic theories. Many investment decisions are not only influenced by economic indicators and rationality, but also by categories such as work experience, social influences, risk tolerance, investor confidence, and the like. Investors' awareness of the behavioral biases and personality and career characteristics that influence their financial decisions allows them to become aware of these factors and be able to overcome them.