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Domain Effects and Financial Risk Attitudes

Authors

  • Ivo Vlaev,

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    • Division of Surgery, Faculty of Medicine, Imperial College London, W2 1NY, UK.

    • ESRC Centre for Economic Learning and Social Evolution (ELSE), University College London, London WC1H OAN, UK.

  • Petko Kusev,

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    • Department of Psychology, Kingston University London, KT1 2EE, UK.

    • Department of Psychology, City University London, London, EC1V 0HB, UK.

  • Neil Stewart,

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    • Department of Psychology, University of Warwick, Coventry, CV4 7AL, UK.

  • Silvio Aldrovandi,

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    • Department of Psychology, City University London, London, EC1V 0HB, UK.

  • Nick Chater

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    • Cognitive, Perceptual and Brain Sciences, University College London, London, WC1H 0AP, UK.

    • ESRC Centre for Economic Learning and Social Evolution (ELSE), University College London, London WC1H OAN, UK.


Address correspondence to Ivo Vlaev, Division of Surgery, Faculty of Medicine, Imperial College London, W2 1NY, UK; i.vlaev@imperial.ac.uk.

Abstract

We investigated whether financial risk preferences are dependent on the financial domain (i.e., the context) in which the risky choice options are presented. Previous studies have demonstrated that risk attitudes change when gambles are framed as gains, losses, or as insurance. Our study explores this directly by offering choices between identical gambles, framed in terms of seven financial domains. Three factors were extracted, explaining 68.6% of the variance: Factor 1 (Positive)—opportunity to win, pension provision, and job salary change; Factor 2 (Positive-Complex)—investments and mortgage buying; Factor 3 (Negative)—possibility of loss and insurance. Inspection of the solution revealed context effects on risk perceptions across the seven scenarios. We also found that the commonly accepted assumption that women are more risk averse cannot be confirmed with the context structure suggested in this research; however, it is acknowledged that in the students’ population the variance across genders might be considerably less. These results suggest that our financial risk attitude measures may be tapping into a stable aspect of “context dependence” of relevance to real-world decision making.

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