This paper proposes and tests a risk model that explains how investors perceive financial risks. The model combines conventional decision‐theory variables—probabilities and outcomes—with behavioral variables from psychology research by Slovic (1987), such as the extent to which a risky item is new, causes worry, and is controllable. To test our model, we conduct two studies in which M.B.A. students judge the risk of a broad range of financial items. Our results indicate that both the decisiontheory variables and Slovic's (1987) behavioral variables are important in explaining investors' risk judgments. Further, we demonstrate that information about the amount of potential loss outcome contained within mandated risk disclosures not only directly influences risk judgments, but also indirectly affects such judgments via its effect on some of Slovic's (1987) behavioral variables. By identifying this unintended consequence of current risk disclosures, these results have the potential to influence the way accounting regulators, firm managers, and academic researchers think about risk disclosure.
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1 January 2005
Research Article|
January 01 2005
How Do Investors Judge the Risk of Financial Items?
Lisa Koonce;
Lisa Koonce
aThe University of Texas at Austin.
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Mary Lea McAnally;
Mary Lea McAnally
bTexas A&M University.
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Molly Mercer
Molly Mercer
cEmory University.
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Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
2005
The Accounting Review (2005) 80 (1): 221–241.
Citation
Lisa Koonce, Mary Lea McAnally, Molly Mercer; How Do Investors Judge the Risk of Financial Items?. The Accounting Review 1 January 2005; 80 (1): 221–241. https://doi.org/10.2308/accr.2005.80.1.221
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