Assessing the Construct Validity of Risk Attitude

Management Science, Vol. 46, No. 10, pp. 1337-1348, 2000

32 Pages Posted: 10 Jun 2003

See all articles by Joost M. E. Pennings

Joost M. E. Pennings

Maastricht University; Wageningen University and Research (WUR); University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

A. Smidts

Erasmus Research Institute of Management (ERIM)

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

Suggested Citation

Pennings, Joost M. E. and Smidts, Ale, Assessing the Construct Validity of Risk Attitude. Management Science, Vol. 46, No. 10, pp. 1337-1348, 2000, Available at SSRN: https://ssrn.com/abstract=334880 or http://dx.doi.org/10.2139/ssrn.334880

Joost M. E. Pennings (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

Wageningen University and Research (WUR) ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

1301 W. Gregory Drive
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Urbana, IL 61801
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217-244-1284 (Phone)
217-333-5538 (Fax)

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

Ale Smidts

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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