Domain Effects and Financial Risk Attitudes

Abstract

We investigated whether financial risk preferences are dependent on the financial domain (i.e., the context) in which the risky choice options are presented. Previous studies have demonstrated that risk attitudes change when gambles are framed as gains, losses, or as insurance. Our study explores this directly by offering choices between identical gambles, framed in terms of seven financial domains. Three factors were extracted, explaining 68.6% of the variance: Factor 1 (Positive)-opportunity to win, pension provision, and job salary change; Factor 2 (Positive-Complex)-investments and mortgage buying; Factor 3 (Negative)-possibility of loss and insurance. Inspection of the solution revealed context effects on risk perceptions across the seven scenarios. We also found that the commonly accepted assumption that women are more risk averse cannot be confirmed with the context structure suggested in this research; however, it is acknowledged that in the students' population the variance across genders might be considerably less. These results suggest that our financial risk attitude measures may be tapping into a stable aspect of "context dependence" of relevance to real-world decision making.

How People's Motivational System and Situational Motivation Influence Their Risky Financial Choices

“…These arguments lead to the conclusion that people may behave differently depending on the frame of the decision—gains or losses. The findings from studies presented by the authors of the Prospect theory (Kahneman and Tversky, 1979, 2000) followed by studies conducted by Kusev et al (2009, 2011) and Vlaev et al (2010), support the hypothesis that decisions under risk may vary depending on the frame of the decision: framed as either loss or gain.…”

“…Furthermore, Kusev et al (2009) provided evidence that variation in the content of decisions leads to variation in financial risk preferences. Moreover, Vlaev et al (2010) postulated that risk preferences may differ depending on the decision domain because the reference point may be different for various domains, for instance, monetary gambling vs. insurance. Vlaev et al (2010) conducted a study in which they distinguished between monetary gambles, hazard losses, investment, insurance, pension provision, job salary change, and mortgage buying.…”

“…Moreover, Vlaev et al (2010) postulated that risk preferences may differ depending on the decision domain because the reference point may be different for various domains, for instance, monetary gambling vs. insurance. Vlaev et al (2010) conducted a study in which they distinguished between monetary gambles, hazard losses, investment, insurance, pension provision, job salary change, and mortgage buying. The results of the study showed that risk attitude estimation is strongly dependent on the financial decision domain.…”

The Effects of Social Interaction and Psychological Bias on Trading Behavior: Evidence from a Laboratory Experiment

“…In addition, in a review of financial risk preferences and financial management areas (i.e. financial domains), Vlaev et al determined that women are relatively more risk-averse than men [10]. Similarly, in a questionnaire-based study of Turkish financial advisers, Tutek et al noted that female financial advisers, at the same risk level, could offer more valuable advice on controlling risk because women are more risk-averse [8].…”

Intergenerational transmission of risk attitudes – A revealed preference approach

“…Dohmen et al (forthcoming) show that the parents' self-reported risk attitude in a specific domain best explains the child's attitude in that domain. However, even within domains differences might arise (Vlaev et al 2010). For instance, an individual might be willing to take income risk but not health risk to proceed in her career.…”