ACADEMIA Letters Does Miscalibration of Financial Risk Tolerance Describe Portfolio Holdings? John Grable, The University of Georgia Eun Jin Kwak, The University of Georgia Wookjae Heo, Purdue University Introduction The idea that sometimes investors mis-calibrate their willingness to take risk has been exam- ined intermittently over the past two decades. The concept of miscalibration is closely asso- ciated with the notion of overconfdence (Nosic and Weber, 2010) and is commonly thought of as an over- or underestimation bias (Grable et al., 2009). A study by Hallahan et al. (2004) illustrates how miscalibration is generally estimated. They asked a sample of investors to complete a test designed to uncover a test-taker’s willingness to engage in fnancial risk-taking behavior. They also asked the test-takers to estimate their risk tolerance using a stated risk- preference measure. When they compared the two, Hallahan and associates noted that 73% of test-takers underestimated their risk tolerance, 23% overestimated their risk tolerance, and 4% were accurate (i.e., risk-tolerance scores were calibrated). Their research showed that miscalibration is likely a widespread occurrence. Risk-tolerance miscalibration can have serious ramifcations for those engaged in fnancial decision-making. Odean (1999) and Pan and Statman (2012) noted overconfdent investors take more risk when allocating investment assets. When someone is overconfdent, the worry is that their portfolio allocation will exceed their true willingness to take a risk, increasing the possibility that they will sell at a loss when portfolio volatility exceeds their comfort or preference level. By extension, those who exhibit underconfdence are more likely to invest Academia Letters, May 2022 Corresponding Author: John Grable, grable@uga.edu Citation: Grable, J., Kwak, E.J., Heo, W. (2022). Does Miscalibration of Financial Risk Tolerance Describe Portfolio Holdings? Academia Letters, Article 5384. 1 ©2022 by the authors — Open Access — Distributed under CC BY 4.0