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The psychometric and empirical properties of measures of risk preferences

Author

Listed:
  • Jonathan P. Beauchamp

    (University of Toronto)

  • David Cesarini

    (New York University)

  • Magnus Johannesson

    (Stockholm School of Economics)

Abstract

We examine the psychometric and empirical properties of some commonly used survey-based measures of risk preferences in a population-based sample of 11,000 twins. Using a model that provides a general framework for making inferences about the component of measured risk attitudes that is not due to measurement error, we show that measurement-error adjustment leads to substantially larger estimates of the predictive power of risk attitudes, of the size of the gender gap, and of the magnitude of the sibling correlation. Risk attitudes are predictive of investment decisions, entrepreneurship, and drinking and smoking behaviors; are robustly associated with cognitive ability and personality; and our estimates are often larger than those in the literature. Our results highlight the importance of adjusting for measurement error across a wide range of empirical settings.

Suggested Citation

  • Jonathan P. Beauchamp & David Cesarini & Magnus Johannesson, 2017. "The psychometric and empirical properties of measures of risk preferences," Journal of Risk and Uncertainty, Springer, vol. 54(3), pages 203-237, June.
    • Handle: RePEc:kap:jrisku:v:54:y:2017:i:3:d:10.1007_s11166-017-9261-3
    DOI: 10.1007/s11166-017-9261-3
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