Individual Risk Attitudes New Evidence from a Large, Representative, ExperimentallyValidated Survey

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Individual Risk AttitudesNew Evidence from a
Large, Representative, Experimentally-Validated
Survey

• Thomas Dohmen, Armin Falk, David Huffman, Uwe
  Sunde
• (IZA, Bonn)
• Jürgen Schupp, Gert G. Wagner
• (DIW, Berlin, and IZA, Bonn)

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Motivation

• Risk and uncertainty are pervasive in economic
  life.
• As a consequence, individual attitudes towards
  risk play a central role in economic theory.
• Predicted to have a decisive impact on almost
  every important economic decision.
• The aim of this paper is to improve understanding
  and measurement of individual risk attitudes.

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Data

• Large, representative sample 22,019 individuals.
• 2004 Wave of the Socioeconomic Panel (SOEP)
• Extensive socio-demographic information. New
  survey measures.
• New survey measures.
• Complementary field experiment 450 individuals.
• Subjects answer same survey measures as in SOEP.
• Also make risky choices for real money.

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Survey Measures

• General Risk Question
• Open-ended, useful benchmark for more specific
  Qs.
• Asks about Willingness to take risks, in
  general
• 11-point response scale completely unwilling to
  completely willing.
• Respondent free to think about curvature of
  utility,but also imagine stakes and probabilities
  involved in taking risks.
• Context Questions
• Same scale, but ask about Car driving, health,
  etc.
• Hypothetical Investment Question
• Willingness to invest in a realistic investment
  opportunity, with explicit stakes and
  probabilities.
• Holds beliefs constant, measures risk preference.

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Outline of the paper

• Distribution of risk attitudes.
• Determinants.
• Does the survey measure predict behavior?
• Alternative measure of risk preference.
• Impact of context on risk attitudes.
• Compare predictive power of different measures.

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Heterogeneity and DeterminantsGeneral Risk
Question
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Distribution of Willingness to Take Risks

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Gender and Willingness to Take Risks

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Age and Willingness to Take Risks
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Age and Willingness to Take Risks
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Parental Ed. and Willingness to Take Risks

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Height and Willingness to Take Risks
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Height and Willingness to Take Risks
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Determinants of Risk Attitudes (Probit)
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Determinants of Risk Attitudes (Probit)
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Determinants of Risk Attitudes (Probit)
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Can Survey QuestionsPredict Behavior?
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Experimental Design

• 450 subjects.
• Representative sample of adult population in
  Germany.
• Subjects answer the general risk question.
• Subjects also make 20 choices for real money
• Each choice is between a lottery and a safe
  option
• Lottery 300 Euros or 0 Euros, with equal
  probability.
• Safe option X Euros for sure, where X varies
  across choices.
• X0 in first choice, increases to 190 in 20th
  choice (by 10S)
• One choice is randomly selected and implemented.
• Measure of risk taking how high does X have to
  be, to induce a switch from the lottery to the
  safe option?

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Validation of Survey Risk Measure
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Alternative Measureof Risk Attitudes
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Survey measure

• Hypothetical Investment Scenario
• Choose how much of 100,000 Euros to invest in a
  hypothetical asset.
• doubles the investment, or returns half, with
  equal probability.
• Possible amounts 0, 20K, 40K, 60K, 80K, 100K
• Holds beliefs constant across individuals.
• Differences can be attributed to differences in
  curvatures of utility.
• Incorporates context of real financial decision.

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Investment in Hypothetical Asset
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Determinants of Investment (Probit)
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Determinants of Investment (Probit)
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Determinants of Investment (Probit)
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CRRA Coefficients (interior responses)
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General Risk Attitude and CRRA Coeff.
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Context and Risk Attitudes
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Correlation of Risk Attitudes Across Domains
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Determinants in Different Contexts

• Do the exogenous factors have the same impact
  across domains?

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Determinants in Different Contexts

• Do the exogenous factors have the same impact
  across domains?
• Gender, Age, Parental Education, and Height
• Affect risk attitudes in most domains.
• Effects are qualitatively similar to general
  risk.
• But magnitudes differ across domains, e.g. gender
  matters more in driving than in financial
  matters.

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Primary Determinants of Risk Attitudes
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Comparing Predictive Powerof Alternative
MeasuresWithin and Across Contexts
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Predicting Behavior in Different Contexts

• Regress behavioral outcomes sequentially on each
  risk measure separately.
• General risk, 5 domain-specific, and hypothetical
  investment choice.
• Behavioral outcomes span the five contexts
  identified in the SOEP
• Real-world portfolio choice, participation in
  sports , occupational choice, smoking, migration,
  life satisfaction, traffic violations.
• Compare predictive power of different measures,
  within and across contexts.

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Determinants of Behavior in Different Domains
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Determinants of Behavior in Different Domains
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Traffic Offenses and Willingness to Take Risks
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Traffic Offenses and Willingness to Take Risks
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Comparing Predictive Power

• Most measures predict behavior across several
  contexts.
• Suggestive of a single risk trait.
• Provides additional evidence that the measures
  are behaviorally relevant.
• However, best predictor of behavior in a given
  context is always corresponding domain-specific
  question.
• Measure of risk attitudes should incorporate
  situation-specific context, in order to predict
  specific behavior.
• E.g. ask about willingness to take risks in
  health matters, in order to predict risky health
  behaviors, rather than using a measure of
  willingness to take risks in financial matters.

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Conclusions

• Self-reported willingness to take risks varies
  across individuals.
• Exogenous factors explain individual differences
• Women and older individuals are more cautious.
• Children of highly-educated parents and taller
  individuals take more risks.
• Survey measures are behaviorally relevant
  predict actual risk-taking behavior in a field
  experiment.

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Conclusions

• Heterogeneity at least partly driven by
  differences in risk preferences, rather than
  subjective beliefs.
• Exogenous factors affect risk preferences in a
  similar way across domains, but magnitude varies.
• CRRA coefficients consistent with range typically
  assumed in economic models.

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Conclusions

• Risk attitudes are strongly but imperfectly
  correlated across contexts.
• All survey measures predict across several
  contexts.
• But best predictor of behavior in a specific
  context is a question framed in terms of that
  context.