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Risk Information and Retirement Investment Choice Mistakes Under Prospect Theory

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  • Hazel Bateman
  • Ralph Stevens
  • Andy Lai

Abstract

We assess alternative presentations of investment risk using a discrete choice experiment which asked subjects to rank three investment portfolios for retirement savings across nine risk presentation formats and four underlying risk levels. Using Prospect Theory utility specifications, we estimate individual-specific parameters for risk preferences in gains and losses, loss aversion, and error propensity variability. Our results support presentations that describe investment risk using probability tails. Risk preferences and error propensity were found to vary significantly across sociodemographic groups and levels of financial literacy. Our findings should assist regulatory efforts to disclose risk information to the mass market.

Suggested Citation

  • Hazel Bateman & Ralph Stevens & Andy Lai, 2015. "Risk Information and Retirement Investment Choice Mistakes Under Prospect Theory," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 16(4), pages 279-296, October.
    • Handle: RePEc:taf:hbhfxx:v:16:y:2015:i:4:p:279-296
    DOI: 10.1080/15427560.2015.1095749
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    Cited by:

    1. Lau Lilleholt, 2019. "Cognitive ability and risk aversion: A systematic review and meta analysis," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 14(3), pages 234-279, May.
    2. Eberhardt, Wiebke & Brüggen, Elisabeth & Post, Thomas & Hoet, Chantal, 2021. "Engagement behavior and financial well-being: The effect of message framing in online pension communication," International Journal of Research in Marketing, Elsevier, vol. 38(2), pages 448-471.
    3. Lazar, Maya & Levkowitz, Amir & Oren, Amit & Sonsino, Doron, 2017. "A note on receptiveness to loss in structured Investment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 69(C), pages 92-98.
    4. repec:cup:judgdm:v:14:y:2019:i:3:p:234-279 is not listed on IDEAS
    5. Vanessa Martins Valcanover & Igor Bernardi Sonza & Wesley Vieira da Silva, 2020. "Behavioral Finance Experiments: A Recent Systematic Literature Review," SAGE Open, , vol. 10(4), pages 21582440209, November.
    6. Thomas Meissner & Xavier Gassmann & Corinne Faure & Joachim Schleich, 2023. "Individual characteristics associated with risk and time preferences: A multi country representative survey," Journal of Risk and Uncertainty, Springer, vol. 66(1), pages 77-107, February.

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