What Drives Risk Perception? A Global Survey with Financial Professionals and Lay People

Risk is an integral part of many economic decisions, and is vitally important in finance. Despite extensiveresearch on decision-making under risk, little is known about how risks are actually perceived by financialprofessionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 financeprofessionals and 4,559 lay people in nine countries representing approx. 50% of the world’s population and morethan 60% of the world’s gross domestic product, we expose participants to return distributions with equalexpected return and we systematically vary the distributions’ next three higher moments. Of these, skewnessis the only moment that systematically affects financial professionals’ perception of financial risk. Strikingly,variance does not influence risk perception, even though return volatility is the most common risk measurein finance in both academia and the industry. When testing other, compound risk measures, the probabilityto experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals’propensity to invest, skewness and loss probability have strong predictive power too. However, volatility andkurtosis also have some additional effect on participants’ willingness to invest. Our results are very similarfor lay people, and they are robust across and within countries with different cultural backgrounds as wellas for different job fields of professionals.