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Are risk preferences stable? -An interdisciplinary analysis of context-invariance risk preferences in a hypothetical investment scenario.

Sarvioskouey, Elnaz LU (2011) NEKM01 20111
Department of Economics
Abstract
The objectives of this paper was to; examine if risk preferences are stable across different distribution contexts, in line with the prediction of the expected utility theory (EUT); if the range frequency theory (RFT) (Parducci, 1965) can account for observed choice behaviour in a hypothetical investment scenario; and lastly, analyse the potential factors that can account for the individual differences in the degree of risk preference stability. In order to tackle these issues, primary data was obtained through a questionnaire, where respondents had provided their certainty equivalent (CE) value for each hypothetical investment gamble (CE values are used as a proxy for risk preferences). The results obtained did not present a general... (More)
The objectives of this paper was to; examine if risk preferences are stable across different distribution contexts, in line with the prediction of the expected utility theory (EUT); if the range frequency theory (RFT) (Parducci, 1965) can account for observed choice behaviour in a hypothetical investment scenario; and lastly, analyse the potential factors that can account for the individual differences in the degree of risk preference stability. In order to tackle these issues, primary data was obtained through a questionnaire, where respondents had provided their certainty equivalent (CE) value for each hypothetical investment gamble (CE values are used as a proxy for risk preferences). The results obtained did not present a general tendency for the stability of risk preferences, rather support for both context-invariance and context-dependence risk preferences. Furthermore, RFT successfully could account for the movement of choice behaviour, however, the scaling of the prediction was not consistent. The effect of ordinal rank was found to influence risk preference stability most extensively. Results from the regression analysis suggest that risk preferences become more context-dependent with age, and more context-invariant with financial literacy. Those who scored high on financial literacy were also found active in the stock market. With an increasingly sophisticated financial markets and consumer sovereignty, the consequences of agents with high context-dependent risk preferences might be poorly made decision. This might have devastating effect for the individual agent, in addition, from a macroeconomic perspective can the aggregation of the individual decisions affect the national economy. (Less)
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author
Sarvioskouey, Elnaz LU
supervisor
organization
course
NEKM01 20111
year
type
H1 - Master's Degree (One Year)
subject
keywords
Range Frequency Theory, Expected Utility Theory, Choice under risk, Stability of risk preferences, Numerical ability, Financial literacy.
language
English
id
2170191
date added to LUP
2011-10-03 14:03:24
date last changed
2011-10-03 14:03:24
@misc{2170191,
  abstract     = {The objectives of this paper was to; examine if risk preferences are stable across different distribution contexts, in line with the prediction of the expected utility theory (EUT); if the range frequency theory (RFT) (Parducci, 1965) can account for observed choice behaviour in a hypothetical investment scenario; and lastly, analyse the potential factors that can account for the individual differences in the degree of risk preference stability. In order to tackle these issues, primary data was obtained through a questionnaire, where respondents had provided their certainty equivalent (CE) value for each hypothetical investment gamble (CE values are used as a proxy for risk preferences). The results obtained did not present a general tendency for the stability of risk preferences, rather support for both context-invariance and context-dependence risk preferences. Furthermore, RFT successfully could account for the movement of choice behaviour, however, the scaling of the prediction was not consistent. The effect of ordinal rank was found to influence risk preference stability most extensively. Results from the regression analysis suggest that risk preferences become more context-dependent with age, and more context-invariant with financial literacy. Those who scored high on financial literacy were also found active in the stock market. With an increasingly sophisticated financial markets and consumer sovereignty, the consequences of agents with high context-dependent risk preferences might be poorly made decision. This might have devastating effect for the individual agent, in addition, from a macroeconomic perspective can the aggregation of the individual decisions affect the national economy.},
  author       = {Sarvioskouey, Elnaz},
  keyword      = {Range Frequency Theory,Expected Utility Theory,Choice under risk,Stability of risk preferences,Numerical ability,Financial literacy.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Are risk preferences stable? -An interdisciplinary analysis of context-invariance risk preferences in a hypothetical investment scenario.},
  year         = {2011},
}