Eliciting Risk Preferences Experimentally versus Using a General Risk Question. Does Financial Literacy Bridge the Gap?

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.

The Effect of Financial Literacy Confidence on Financial Risk Preference Confidence. A Lab Experiment Approach

“…Self-assessment or perceived and objective measures of financial literacy are associated with financial behavior (Allgood & Walstad, 2016). Conversely, a weak correlation between objective and subjective measures of financial literacy and risk preference was also concluded in other studies (Mudzingiri & Koumba, 2021; Parker et al, 2012; Parker & Stone, 2014). The uniqueness of this study is that it goes beyond analyzing the correlation between subjective and objective responses collected by instruments used to measure financial literacy and risk preferences.…”

“…The subjects completed a questionnaire that collected their demographic characteristics, subjective financial literacy ranking, and subject risk preference ranking responses. The subjects completed four risk preference tasks and a 30-question financial literacy test (see Mudzingiri & Koumba, 2021). An invitation to participate in the study was sent through blackboard, an online learning platform.…”

“…The subjects completed four typical MPL risk preference tasks (see Table 2) with different payoffs. For further clarity on the procedure followed (see Mudzingiri & Koumba, 2021). 772 (193 subjects 3 4 games) data points were collected.…”

“…Measuring financial literacy confidence and financial risk preference confidence in a natural environment setup has always posed a challenge to researchers. Studies have either used subjective questions with Likert scales in surveys or fused subjective and objective instruments to measure confidence (Bonsang & Dohmen, 2015;Fisher & Yao, 2017;Mudzingiri & Koumba, 2021). The divergence between objective and subjective measures of financial literacy or other domain responses represents less or over confidence (Chu et al, 2017; K. T. Kim et al, 2020).…”

Evaluation of investment preference with phantasy, emotional intelligence, confidence, trust, financial literacy and risk preference

“…Therefore, high financial literacy does not guarantee the right decision Mitchell, 2011, 2014;Kawamura et al, 2021). Increasing financial literacy increases trust in both the judiciary (Kanagasabai and Aggarwal, 2019) and risk perception (Mudzingiri and Koumba, 2021). These factors, which negatively interfere with the judiciary for investors, can be controlled with the help of financial literacy (Kanagasabai and Aggarwal, 2019).…”