Eliciting risk preferences experimentally versus using a general risk question. Does financial literacy bridge the gap?
Loading...
Date
2021
Authors
Mudzingiri, Calvin
Koumba, Ur
Journal Title
Journal ISSN
Volume Title
Publisher
MDPI
Abstract
The study investigates the stability of financial risk preference choices elicited from subjects
by way of two methods, namely: experimentally elicited incentivized revealed risk preferences
(IRRP) and (self-reported) perceived willingness to take a financial risk (PWTFR). The research
further examines whether financial literacy (a human capital aspect) helps in reducing the gap
between IRRP and PWTFR choices made by subjects. A total of 193 university students (where 53%
were female) participated in the study. The subjects completed IRRP choices from four multiple price
list (MPL) risk preference tasks and a financial literacy questionnaire. There is a tendency to anchor
at extremes of risk-seeking behavior when subjects self-report their PWTFR choices. A paired t-test
analysis of the two methods shows that the average responses from the two methods are significantly
different. A random effect (RE) panel regression shows that an increase in financial literacy narrows
the gap between IRRP and PWTFR choices. The study’s findings show that responses by subjects
from a PWTFR general risk question (GRQ) and IRRP experiment are unstable and inconsistent. What
people say in a survey does not always translate into what they do when faced with a risk preference
choice dilemma. Financial literacy helps individuals to predict their risk attitudes more precisely.
Description
Keywords
Incentivized revealed risk preferences, Perceived financial risk, General risk question, Risk tolerance gap, Financial literacy, Theory comparison approach
Citation
Mudzingiri, C., & Koumba, U. (2021). Eliciting risk preferences experimentally versus using a general risk question. Does financial literacy bridge the gap? Risks, 9: 140. https://doi.org/10.3390/risks9080140