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

2. 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)

3. Ordered Binary Choices (OBC) Option AOption BRRA Coef. with u(x) = x 1-r /(1-r) 10% €0.00, 90% €100.00 ↔10% €17.50, 90% €26.700.92 20% €0.00, 80% €100.00 ↔20% €17.50, 80% €26.700.84 30% €0.00, 70% €100.00 ↔30% €17.50, 70% €26.700.75 40% €0.00, 60% €100.00 ↔40% €17.50, 60% €26.700.66 50% €0.00, 50% €100.00 ↔50% €17.50, 50% €26.700.54 60% €0.00, 40% €100.00 ↔60% €17.50, 40% €26.700.41 70% €0.00, 30% €100.00 ↔70% €17.50, 30% €26.700.25 80% €0.00, 20% €100.00 ↔80% €17.50, 20% €26.700.02 90% €0.00, 10% €100.00 ↔80% €17.50, 20% €26.70-0.36

4. Ordered-Lottery Choice (OLC) pOutcome RRA Coef. with u(x) = x 1-r /(1-r) L11€1.000.91 L20.9€2.200.82 L30.8€3.800.73 L40.7€5.700.64 L50.6€8.300.55 L60.5€12.000.46 L70.4€17.500.36 L80.3€26.700.27 L90.2€45.000.18 L100.1€100.000.09

5. 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 ↔€20-0.43 90% €0, 10% €100 ↔€30-0.91 90% €0, 10% €100 ↔€40-1.51 90% €0, 10% €100 ↔€50-2.32 90% €0, 10% €100 ↔€60-3.51 90% €0, 10% €100 ↔€70-5.46 90% €0, 10% €100 ↔€80-9.32 90% €0, 10% €100 ↔€90-20.85 90% €0, 10% €100 ↔€100-

6. 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.

7. Comparison of Methods (n=35) Average RRA: 0.64 Average RRA: -1.25 Correlation: 0.26 (p-val., 0.12) OBC CE

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

9. 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) 5 1 2 3 4 Very unlikely Very likely Likely Unlikely Not sure 5 1 2 3 4 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:

10. 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.