On the Linkage between Financial Risk Tolerance and Risk Aversion: Evidence from a Psychometrically-Validated Survey Versus an Online Lottery Choice Experiment

29 Pages Posted: 24 Nov 2006

See all articles by Robert W. Faff

Robert W. Faff

University of Queensland

Daniel Mulino

Monash Business School

Daniel Chai

Monash University

Date Written: November 22, 2006

Abstract

There are two related literatures on financial risk tolerance (FRT) (based on psychometrically-validated surveys) and risk aversion (based on lottery experiments) that hitherto have not been intersected. Exploring their integration is the primary goal of this paper. Specifically, we follow a two stage process: (1) we obtain FRT scores from a psychometrically-validated survey on a sample of 162 people; and (2) we conduct a battery of lottery choice experiments on the same people. The second stage is primarily distinguished from earlier lottery choice experiments by being online and involving non-student subjects. Moreover, we contrast: real and hypothetical payoffs; low and high stake payoffs; decisions involving gains and losses; and order effects. Our key finding is that the two approaches to analysing decision-making under uncertainty are strongly aligned. We present evidence that this is particularly the case for the female participants in our sample. There is also some evidence that the alignment is strengthened when high stake gambles are employed.

Keywords: Financial Risk Tolerance, Risk Aversion, Psychometric Survey, Online Lottery Choice Experiment

JEL Classification: D81, G19

Suggested Citation

Faff, Robert W. and Mulino, Daniel and Chai, Daniel, On the Linkage between Financial Risk Tolerance and Risk Aversion: Evidence from a Psychometrically-Validated Survey Versus an Online Lottery Choice Experiment (November 22, 2006). Available at SSRN: https://ssrn.com/abstract=946679 or http://dx.doi.org/10.2139/ssrn.946679

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Daniel Mulino

Monash Business School ( email )

Economics Department
Wellington Road
Clayton 3168, Victoria
Australia
61 3 9905 8159 (Phone)
61 3 9905 5476 (Fax)

Daniel Chai

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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