University of Warwick, March 2010 The Measurement of Risk Attitudes: Are We Doing it Right? Daniel Navarro-Martinez.

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Presentation transcript:

University of Warwick, March 2010 The Measurement of Risk Attitudes: Are We Doing it Right? Daniel Navarro-Martinez

Some Economic Methods to Measure Risk Attitudes Three task-oriented mechanisms:  Ordered binary choices (OBC) (e.g., Holt and Laury, 2002)  Ordered-lottery choice (OLC)  Certainty equivalent (CE)

Ordered Binary Choices (OBC) Option AOption BRRA Coef. with u(x) = x 1-r /(1-r) 10% €0.00, 90% € ↔10% €17.50, 90% € % €0.00, 80% € ↔20% €17.50, 80% € % €0.00, 70% € ↔30% €17.50, 70% € % €0.00, 60% € ↔40% €17.50, 60% € % €0.00, 50% € ↔50% €17.50, 50% € % €0.00, 40% € ↔60% €17.50, 40% € % €0.00, 30% € ↔70% €17.50, 30% € % €0.00, 20% € ↔80% €17.50, 20% € % €0.00, 10% € ↔80% €17.50, 20% €

Ordered-Lottery Choice (OLC) pOutcome RRA Coef. with u(x) = x 1-r /(1-r) L11€ L20.9€ L30.8€ L40.7€ L50.6€ L60.5€ L70.4€ L80.3€ L90.2€ L100.1€

Certainty Equivalence (CE) Task Option AOption BRRA Coef. with u(x) = x 1-r /(1-r) 90% €0, 10% €100 ↔€0€0- €100 90% €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€ % €0, 10% €100 ↔€100-

Three important shortcomings  Relying on EUT (especially assuming CRRA) to measure risk attitudes.  Measuring risk attitudes in a context- independent way.  Using well-defined numerical outcomes and probabilities.

Comparison of Methods (n=35) Average RRA: 0.64 Average RRA: Correlation: 0.26 (p-val., 0.12) OBC CE

Comparison of Methods Average RRA: 0.40 Average RRA: 0.13 Rank Derived from CEs OLC

Measurement Through Psychometric scales  Numerical scales obtained from ratings of natural language statements - Betting a day’s income on the outcome of a sporting event (e.g. baseball, soccer, or football) Very unlikely Very likely Likely Unlikely Not sure Very unlikely Very likely Likely Unlikely Not sure - Investing 5% of your annual income in a very speculative stock FOR EACH OF THE FOLLOWING STATEMENTS, PLEASE INDICATE YOUR LIKELIHOOD OF ENGAGING IN EACH ACTIVITY OR BEHAVIOUR:

Measurement Through Psychometric scales  Domain-specific risk-taking (DOSPERT) scale (Weber, Blais and Betz, 2002)  5 main domains: Ethical, Financial, Health/Safety, Recreational, Social  Financial domain subdivided in Investment and Gambling  Some evidence suggests that these measures are only weakly correlated with the economic methods  They are however significantly correlated with some real-world risky behaviours and decisions.