Investment Risk Framing and Individual Preference Consistency

39 Pages Posted: 27 Aug 2010 Last revised: 12 Apr 2011

See all articles by Hazel Bateman

Hazel Bateman

UNSW Sydney, CEPAR

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing

John Geweke

University of Technology Sydney - Economics Discipline Group

Jordan J. Louviere

University of South Australia - Institute for Choice

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: April 10, 2011

Abstract

Here we test the usefulness of a discrete choice experiment (DCE) for identifying individuals who consistently exhibit concave utility over returns to wealth, despite variations in the framing of risk. At the same time, we test the relative strengths of nine standard descriptions of investment risk. We ask a sample of 1200 retirement savings account holders to select their most and least preferred investment strategies from a menu of a safe (zero risk) savings account, a risky growth asset portfolio and a 50:50 share of both. We identify respondents who fail to conform with expected utility and test whether this behavior is predictable across different risk frames. Tests confirm that the DCE can help isolate individuals whose preferences violate global risk aversion despite variation in risk presentation. We also identify frames linked to significantly more consistent behavior by respondents. These are frames which simultaneously specify upside and downside risk. Frames that present risk as a frequency of failures or successes against a zero returns benchmark are more likely to generate violations of risk aversion.

Keywords: investment risk, household finance, framing, retirement savings

JEL Classification: G23, G28, D14

Suggested Citation

Bateman, Hazel and Eckert, Christine and Geweke, John and Louviere, Jordan J. and Satchell, Stephen E. and Thorp, Susan, Investment Risk Framing and Individual Preference Consistency (April 10, 2011). UNSW Australian School of Business Research Paper No. 2010ACTL08. Available at SSRN: https://ssrn.com/abstract=1664869 or http://dx.doi.org/10.2139/ssrn.1664869

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

John Geweke

University of Technology Sydney - Economics Discipline Group ( email )

645 Harris Street
Sydney, NSW 2007
Australia
0295149797 (Phone)

HOME PAGE: http://www.censoc.uts.edu.au/about/members/jgeweke_papers.html

Jordan J. Louviere

University of South Australia - Institute for Choice ( email )

Level 13
140 Arthur Street
North Sydney, New South Wales 2060
Australia

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Susan Thorp (Contact Author)

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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