Assessing the Construct Validity of Risk Attitude

Abstract

Two major approaches to measuring risk attitude are compared. One, based on the expected utility model is derived from responses to lotteries and direct scaling. The other measure is a psychometric approach based on Likert statements that produces a unidimensional risk attitude scale. The data are from computer-assisted interviews of 346 owner-managers who made decisions about their own businesses. While the measures demonstrate some degree of convergent validity, the measures based on lotteries predicted actual market behavior better than the psychometric scale. In contrast the psychometric scale showed more coherence with self-reported measures such as innovativeness, market orientation, and the intention to reduce risk. In the light of the apparently higher predictive validity of the lottery-based measurements, we recommend elicitation methods based on the expected utility paradigm for understanding managerial decision making under risk.

Keywords: Managerial Decision Making Under Risk, Risk Attitude, Utility Theory, Psychometric Scaling, Nomological Validity, Price Risk

JEL Classification: G0, Q0, C5, M0