Which Measures Predict Risk Taking in a Multi-Stage Controlled Decision Process?

Abstract

We assess the ability of different risk profiling measures to predict risk taking along a multi-stage decision process. The latter involves decisions under ambiguity, decisions under risk, decisions after gaining experience and decisions after receiving outcome information on previous decisions. We find that in all decisions risk taking can be predicted by some questions on individuals’ risk tolerance but it is not related to self-reported investment experience. Although simulated experience as part of our study design improves the risk awareness and leads to higher risk taking, it cannot substitute the assessment of risk tolerance and in particular the assessment of individual’s loss aversion. In contrast, self-assessed risk tolerance measures are not suitable for predicting risk taking in any stage of the decision process. Among the socioeconomic characteristics only the gender has some predictive power.

Keywords: investment advice, risk profiling, experience sampling, risk attitude, risk perception, risk preferences

JEL Classification: D81, G11