The Paradoxical Behavioral Effects of a Directional Goal on Risk Perceptions and Valuation Judgments

Individuals who evaluate business-related risks often have a preference or goal for the business to perform well. In this paper, we test how such a directional goal affects risk perceptions and the relation between risk perceptions and assessments of value in an investment context. Compared to investors without directional goals — who, consistent with prior behavioral research, focus on negative aspects of risk — we find that those with directional goals assess risk as being more symmetric (i.e., they are less focused on downside risk). However, investors with directional goals are also less likely to consider risk when assessing value. Taken together, these results suggest that a directional goal reduces one behavioral effect identified in prior literature (the tendency to focus on downside risk), but creates another behavioral effect (ignoring risk in assessing value)