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Comparisons of Risk Attitudes Across Individuals

  1. Daniel Egan,
  2. Greg B. Davies,
  3. Peter Brooks

Published Online: 14 JAN 2011

DOI: 10.1002/9780470400531.eorms0169

Wiley Encyclopedia of Operations Research and Management Science

Wiley Encyclopedia of Operations Research and Management Science

How to Cite

Egan, D., Davies, G. B. and Brooks, P. 2011. Comparisons of Risk Attitudes Across Individuals. Wiley Encyclopedia of Operations Research and Management Science. .

Author Information

  1. Barclays Wealth, Behavioural Finance, London, UK

Publication History

  1. Published Online: 14 JAN 2011

Abstract

In comparing risk attitudes across individuals we usually aim to determine whether one can reliably measure a difference in risk attitudes between two individuals, the magnitude of that difference, and what factors should be controlled for to ensure comparisons are meaningful. These comparisons critically depend on the method of risk attitude measurement and elicitation used, and a clear understanding of what the modeled risk attitude represents. Individual risk attitudes are fragile and very specific to domain and framing effects, and thus comparisons should always be made within the same elicitation method.

Depending on the measurement method, comparisons can be made on relative or absolute scales. In general, the more precise the measurement, the more sensitive it will be to slight changes in assessment. Psychometric measures are the simplest and most robust, but allow only for ordinal comparisons. Certainty equivalent and utility models of choices can give more precise, but noisy, cardinal estimates of individual risk aversion. The purpose and need for precision of the comparison will often drive the method a researcher chooses for eliciting risk attitudes, and advice is given for researchers seeking to design or analyze such studies.

Keywords:

  • risk attitude;
  • risk aversion;
  • risk tolerance;
  • individual differences;
  • psychometric;
  • behavioral;
  • comparisons;
  • utility functions;
  • culture;
  • demographics