Risk Information and Retirement Investment Choices Under Prospect Theory
48 Pages Posted: 5 Mar 2013
Date Written: December 21, 2012
We assess alternative presentations of investment risk using a discrete choice experiment which asked subjects to rank three investment portfolios for retirement savings across nine risk presentation formats and four underlying risk levels. Using Prospective Theory utility specifications we estimate individual-specific parameters for risk preferences in gains and losses, loss aversion and error propensity variability. Our results support presentations that describe investment risk using probability tails. Risk preferences and error propensity were found to vary significantly across sociodemographic groups and levels of financial literacy. Our findings should assist regulatory efforts to disclose risk information to the mass market.
Keywords: Discrete choice, investment risk, Prospect theory
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