Financial Competence, Risk Presentation and Retirement Portfolio Preferences

50 Pages Posted: 8 Mar 2011 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: March 1, 2011

Abstract

We investigate risk presentations in retirement savings decisions using a discrete choice experiment where subjects choose between a bank account, a growth account and a 50:50 account. Using nine standard formats for investment risk, we analyze responses to risk per se and to format changes. Switching between formats changes individuals' investment decisions, given constant risk and return. Choices made under graphical and textual presentations contrast markedly, as do choices based on formats that emphasize event frequencies rather than return ranges or values at risk. Less numerate individuals tend to be more susceptible to format changes, but higher-than-average personal financial competence does not eliminate presentation effects. Respondents with weak basic financial literacy are less sensitive to changes in underlying risk, regardless of presentation format. Variations in demographics and expectations can impact account choice probabilities at least as much as variation in the risk/return trade-off. Policy-makers and industry need to coordinate over financial product disclosures and initiatives for improving financial competence.

Keywords: discrete choice, risk preference, numeracy skills, financial literacy

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, Financial Competence, Risk Presentation and Retirement Portfolio Preferences (March 1, 2011). UNSW Australian School of Business Research Paper No. 2011ACTL03. Available at SSRN: https://ssrn.com/abstract=1776528 or http://dx.doi.org/10.2139/ssrn.1776528

Hazel Bateman (Contact Author)

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

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

Register to save articles to
your library

Register

Paper statistics

Downloads
172
rank
171,069
Abstract Views
2,058
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information