On the Linkage between Financial Risk Tolerance and Risk Aversion: Evidence from a Psychometrically-Validated Survey versus an Online Lottery Choice Experiment

Robert W. Faff, Daniel Mulino, Daniel Chai
2006 Social Science Research Network  
In this paper, we explore the linkage between two related concepts describing an individual's attitude towards risk, namely, financial risk tolerance (FRT) and risk aversion. The former is measured from survey data and the latter from data from lottery experiments. Specifically, we follow a two stage process: (1) we obtain FRT scores from a psychometrically-validated survey on a sample of 162 people; and (2) we conduct a battery of lottery choice experiments on the same people. The second stage
more » ... e. The second stage is primarily distinguished from earlier lottery choice experiments by being online and involving non-student subjects. Moreover, we contrast: real and hypothetical payoffs; low and high stake payoffs; decisions involving gains and losses; and order effects. Our key finding is that the two approaches to analysing decision-making under uncertainty are strongly aligned. We present evidence that this is particularly the case for the female participants in our sample. There is also some evidence that the alignment is strengthened when high stake gambles are employed. JEL Classification: D81; G19
doi:10.2139/ssrn.946679 fatcat:ylvjfyqe6fasfaw7ury54va2j4