The Psychometric and Empirical Properties of Measures of Risk Preferences

63 Pages Posted: 7 Jun 2015

See all articles by Jonathan Beauchamp

Jonathan Beauchamp

University of Toronto

David Cesarini

New York University (NYU); IFN

Magnus Johannesson

Stockholm School of Economics - Department of Economics

Date Written: May 5, 2015

Abstract

We conduct a detailed examination of the psychometric and empirical properties of some commonly used survey-based measures of risk preferences in a population-based sample of 11,000 twins. Using a model that provides a general framework for making inferences about the component of measured risk attitudes that is not due to measurement error, we show the measurement-error adjustment leads to substantially larger estimates of the predictive power of risk attitudes, of the size of the gender gap, and of the magnitude of the sibling correlation. Risk attitudes are predictive of investment decisions, entrepreneurship, and health behaviors such as smoking and drinking, are robustly associated with cognitive ability and personality, and our estimates are often larger than those in the literature. One implication of our results is that the small amounts of variation that the risk measures have previously been reported to explain are in part artifacts of imperfect measurement.

Keywords: Risk preferences, measurement error, test-retest data, psychometrics, predictive power, entrepreneurship, portfolio choice, cognitive ability, personality

JEL Classification: C50, C81

Suggested Citation

Beauchamp, Jonathan and Cesarini, David and Johannesson, Magnus, The Psychometric and Empirical Properties of Measures of Risk Preferences (May 5, 2015). Available at SSRN: https://ssrn.com/abstract=2614973 or http://dx.doi.org/10.2139/ssrn.2614973

Jonathan Beauchamp (Contact Author)

University of Toronto ( email )

150 St-George St
Toronto, Ontario M5S3G7
Canada

David Cesarini

New York University (NYU) ( email )

19 W 4th Street
6FL
New York, NY 10012
United States

IFN ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Magnus Johannesson

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden

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