Risk Information and Retirement Investment Choices Under Prospect Theory

48 Pages Posted: 5 Mar 2013

See all articles by Hazel Bateman

Hazel Bateman

UNSW Sydney, CEPAR

Andy Lai

University of New South Wales (UNSW) - School of Actuarial Studies

Ralph Stevens

CPB Netherlands Bureau of Economic Policy Analysis; CEPAR

Date Written: December 21, 2012

Abstract

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

Suggested Citation

Bateman, Hazel and Lai, Andy and Stevens, Ralph, Risk Information and Retirement Investment Choices Under Prospect Theory (December 21, 2012). UNSW Australian School of Business Research Paper No. 2012ACTL19. Available at SSRN: https://ssrn.com/abstract=2228481 or http://dx.doi.org/10.2139/ssrn.2228481

Hazel Bateman (Contact Author)

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Andy Lai

University of New South Wales (UNSW) - School of Actuarial Studies ( email )

Sydney, NSW 2052
Australia

Ralph Stevens

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

HOME PAGE: http://https://www.cpb.nl/medewerkers/ralph-stevens

CEPAR ( email )

Sydney, NSW 2052
Australia
+61 2 9385 1883 (Fax)

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