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Measurement of risk preference

Author

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  • Filiz, Ibrahim
  • Nahmer, Thomas
  • Spiwoks, Markus
  • Gubaydullina, Zulia

Abstract

The procedures previously used to determine risk preference (risk-averse, risk-neutral or risk-loving) exhibit a number of weaknesses. In part, they are so complex and sophisticated that the subjects frequently give spontaneous, ill-considered answers. In this way, their actual risk preference can often not be correctly determined. In addition, in this process there are situations and circumstances in which it is not possible to clearly assign subjects to one of the three categories of risk preference. In addition, with the previous approaches, loss aversion – which has an important influence on risk preference – is not taken into consideration, or only insufficiently. We propose here a new procedure to determine risk preference which is (1) extremely simple and clear, which (2) enables unambiguous differentiation between risk-averse, risk-neutral and risk-loving subjects, and which (3) takes the influence of loss aversion on risk preference into account in an appropriate way.

Suggested Citation

  • Filiz, Ibrahim & Nahmer, Thomas & Spiwoks, Markus & Gubaydullina, Zulia, 2020. "Measurement of risk preference," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    • Handle: RePEc:eee:beexfi:v:27:y:2020:i:c:s2214635019303120
    DOI: 10.1016/j.jbef.2020.100355
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    More about this item

    Keywords

    Risk preference; Loss aversion; Portfolio choice; Diversification behavior; Behavioral finance; Experimental research;
    All these keywords.

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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