Linking subjective and incentivized risk attitudes: The importance of losses
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Linking subjective and incentivized risk attitudes: The importance of losses Johannes G. Jaspersen1 · Marc A. Ragin2 · Justin R. Sydnor3
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract The “general risk question” (GRQ) has been established as a quick way to meaningfully elicit subjective attitudes toward risk and correlates well with real-world behaviors involving risk. However, little is known about what aspects of attitudes toward financial risk are captured by the GRQ. We examine how answers to the GRQ correlate with different preference motives and biases toward financial risk using an incentivized choice task (n=1,730). We find that the GRQ has meaningful correlation with loss aversion and attitudes toward variation in financial losses, but much weaker to non-existent correlations with attitudes toward variation in financial gains, likelihood insensitivity, and certainty preferences. These results suggest that practical applications using the GRQ as an index for financial risk preferences may be most appropriate in settings where decisions rest on attitudes toward financial losses. Keywords Risk aversion · Experimental measurement · Prospect theory · General risk question JEL Classifications C90 · D00 · D81
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11166-020-09327-4) contains supplementary material, which is available to authorized users. We thank the Alfred P. Sloan Foundation for financial support under grant number G-2016-7312. For helpful feedback and comments, we are indebted to Sebastian Ebert, Ferdinand Vieider, Philipp Wichardt, and seminar participants at Universit¨at Hamburg, the Southern Risk and Insurance Association annual meeting, and the American Risk and Insurance Association annual meeting. All remaining errors are ours. Justin R. Sydnor
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Extended author information available on the last page of the article.
Journal of Risk and Uncertainty
1 Introduction Risk attitudes play a major role in almost all economic decisions. They determine consumer preferences over products such as health care, insurance, and investment alternatives. This makes them crucial for policy analyses and highlights their importance in the design of social welfare systems. They also play a vital role in a variety of managerial decisions such compensation schemes, optimal investments, make-or-buy decisions or supply chain design. One attractive method for assessing attitudes toward risk comes from Dohmen et al. (2011), who developed and validated a simple psychometric scale measuring willingness to take on risk. This measure is often called the “general risk question” (henceforth GRQ, Charness et al. 2013).1 The GRQ has been found to correlate well with a number of real-world behaviors involving risk (Dohmen et al. 2011) and has high test-retest stability (L¨onnqvist et al. 2015). Vieider et al. (2015) also found that the GRQ correlated with certainty equivalents for lotteries in populations across many countrie
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