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The salience of informed risk: an experimental analysis

Author

Listed:
  • Marco Santorsola
  • Rocco Caferra
  • Andrea Morone

Abstract

Purpose - Expanding on the real-world financial market framework and considering the current market turmoil, with cryptocurrencies (where contracts for difference (CFDs) are extremely common) (Hassoet al., 2019) displaying unprecedented volatility, the authors aim to test in an online laboratory setting whether displaying a risk warning message is truly effective in reducing the level of risk taken and whether the placement of this method makes a difference. Design/methodology/approach - To explore the impact of risk disclosure framing on risk-taking behavior, the authors conducted an online pair-wise lottery choice experiment. In addition to manipulating risk awareness through the presence or absence of risk warning messages of varying intensity, the authors also considered dynamic inconsistency, cognitive ability and questionnaire-based financial risk tolerance (FRT) scores. The authors aimed to identify potential relationships between these variables and experimentally elicited risk aversion. The authors' study offers valuable insights into the complex nature of risky decision-making and sheds light on the importance of considering dynamic inconsistency in addition to risk awareness and aversion. Findings - The authors' results provide statistical evidence for the efficacy of informative and very salient messages in mitigating risky decision, hinting at several policy implications. The authors also provide some statistical evidence in support of the relationship between cognitive abilities and risk preferences. The authors detect that individual with low cognitive abilities scores display great risk aversion. Originality/value - This study investigates the impact of risk warning messages on investment decisions in an online laboratory setting – a unique approach. However, the authors go beyond this and also examine the potential influence of dynamic inconsistency on decision-making, adding further value to the literature on this topic. To ensure a comprehensive understanding of the participants, the authors collect data on cognitive ability and FRT using questionnaires. This study provides a simple and cost-effective framework that can be easily replicated in future research – a valuable contribution to the field.

Suggested Citation

  • Marco Santorsola & Rocco Caferra & Andrea Morone, 2023. "The salience of informed risk: an experimental analysis," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 51(9), pages 21-35, June.
    • Handle: RePEc:eme:jespps:jes-09-2022-0483
    DOI: 10.1108/JES-09-2022-0483
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    More about this item

    Keywords

    Individual decision-making; Risk; Dynamic inconsistency; Experimental economics; Information effect; Finance;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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