The Psychometric and Empirical Properties of Measures of Risk Preferences
63 Pages Posted: 7 Jun 2015
Date Written: May 5, 2015
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: Suggested Citation