revealed vs perceive risk preferences

Published: 18 November 2020| Version 1 | DOI: 10.17632/hrcdhf6y82.1
Contributor:
Calvin Mudzingiri

Description

The data compares whether incentivized revealed risk preferences and perceived willingness to take financial risk choices made by subjects coincide. Eliciting perceived willingness to take financial risk (PWTFR) The PWTFR question was framed as follows: When thinking of your financial investments, how willing are you to take risks? Please use a 10-point scale, where 1 means “Not At All Willing” and 10 means “Very willing.” (Lusardi and Mitchell 2011). Highly risk averse subjects chose values closer to ‘1’ and highly risk loving or seeking chose values close to ‘10’. In the analysis the choices were reverse coded such that ‘1’ became ‘10’ vice-versa. The reverse coding is done to ensure easy comparison of PWTFR and IRRP choices. Eliciting revealed incentivized risk preferences The subjects completed four typical IRRP tasks with varying pay offs for lottery A or B (Table 1; Task 1). The pay-off for the tasks were as follows: Task 2, lottery A (R70); lottery B (R110), Task 3, lottery A (R250); lottery B (R400) and task 4, lottery A(R200); lottery B (300) (Mudzingiri 2019; Andersen et al. 2008; Holt and Laury 2002). Ten percent of the subjects were randomly selected and paid for one of their choices in one of the four tasks completed. The amount won were disbursed on the day the experiment was conducted. The study specified a constant relative risk aversion (CRRA) money utility function: U(x)=x^(1-r) (1) Where r is the risk parameter, x is the monetary payoff. If r<0 an individual is risk seeking or loving, r=0 one is risk neutral and r>0 an individual is risk averse (Holt and Laury 2002). In this study the risk parameters for choices made by subjects were not calculated. The research recorded the safe choices made by individuals all the tasks completed. There are studies that have resorted to recording of safe choices in analysing risk preferences (Bellemare and Shearer 2010; Drichoutis and Lusk 2016). The definition for the safe choices in this study is the total numbers of Lottery A choices made by an individual in all the four tasks completed. The calculated risk parameters in Andersen et al. (2008) shows that switching from lottery A to Lottery B in row 1 reveals that an individual is risk loving while switching from lottery A to lottery B in row 9 show a high degree of risk aversion (Table 1). Therefore, few safe choices (close to 1) shows that a subject is risk seeking or loving while high number of safe choices (close to 10) show high level of risk aversion among subjects. All zero safe choices of lottery A were recorded as choices for row 1. This is meant to ensure matching of observations from PWTFR and IRRP. The sum of safe choices made by subjects range across 1 to 10 inclusive. A typical IRRP MPL task is shown in Table 1.

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Steps to reproduce

To analyse the data open the 'risklogs' do file in STATA 16. execute the commands sentence by sentence.