The Psychology of Financial Risk-Taking

Thrill-seeking isn't just about jumping out of airplanes. People willing to take risks in their everyday lives are also more likely to make risky financial decisions, according to a new study.

This tendency may help explain the origins of the current financial crisis, say the European authors of a new study published in the journal Psychological Science in the Public Interest.

The study, conducted by four European academics, examined the psychology of financial decision-making , including the role of perceived risk in making economic choices; how individuals behave in stock and credit markets; and how financial crises affect people’s well-being.

It turns out that the willingness to be a risk-taker is a very important component of financial decision-making.

When we make financial investment or loan decisions without being sure of the outcome, the perceived risk of the decision depends on an individual's personality type, the study showed. People who are extroverted and like excitement are likelier to make riskier decisions than people who are more conscientiousness and experience more frequent anxiety.

“The general implication is that financial crises may have more serious consequences for people who are more likely to take financial risks,” the authors wrote.