An Analysis of Risk Assessment Questions Based on Loss-Averse Preferences

31 Pages Posted: 18 Feb 2014 Last revised: 21 Apr 2015

See all articles by Michael Guillemette

Michael Guillemette

Texas Tech University - Department of Personal Financial Planning

Rui Yao

University of Missouri at Columbia - Department of Personal Finance Planning

Russell N. James

Texas Tech University

Multiple version iconThere are 2 versions of this paper

Date Written: February 17, 2014

Abstract

A variety of risk assessment questionnaires are used within the financial planning profession to assess client risk preferences. Evidence indicates that the average person overweighs losses relative to an arbitrary reference point. This paper evaluated risk assessment questions on how well they correlate with monetary loss aversion. Twenty-nine Western Texas residents between the ages of 27 and 56 participated in experimental research and filled out several risk assessment questionnaires. Two weeks later their levels of loss aversion were measured using monetary gain and loss scenarios. The individual risk assessment questions were placed into three categories: expected utility theory, prospect theory and self-assessment. Composite measures were created for within-group and between-group comparisons. Statistically significant correlations were found between monetary loss aversion and different composite measures. The results provide financial planners with a group of risk assessment questions that capture loss-averse preferences.

Keywords: loss aversion, portfolio allocation, questionnaire, risk tolerance, skin conductance response

JEL Classification: D81

Suggested Citation

Guillemette, Michael and Yao, Rui and James, Russell N., An Analysis of Risk Assessment Questions Based on Loss-Averse Preferences (February 17, 2014). Journal of Financial Counseling and Planning, 2015, Available at SSRN: https://ssrn.com/abstract=2397556 or http://dx.doi.org/10.2139/ssrn.2397556

Michael Guillemette (Contact Author)

Texas Tech University - Department of Personal Financial Planning ( email )

1301 Akron Ave, HS-260
Box 41210
Lubbock, TX 79409-1210
United States

Rui Yao

University of Missouri at Columbia - Department of Personal Finance Planning ( email )

239 Stanley Hall
Columbia, MO 65211-7700
United States
573-882-9343 (Phone)
573-884-8389 (Fax)

HOME PAGE: http://pfp.missouri.edu/faculty_yao.html

Russell N. James

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

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