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Elicitation of risk preferences through satisficing

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  • Ranganathan, Kavitha
  • Lejarraga, Tomás

Abstract

Financial institutions across the globe are now required to measure how much risk their clients are willing to accept. Despite its importance, there is no consensus on how to assess risk attitudes in providing adequate and legally compliant financial services. The standard approaches have been challenged. Recently, financial regulators have begun to focus on the worst possible scenario: Retail investors should be inquired about how much loss they are willing and able to bear. We examine the satisficing method, a recent approach that brings the worst possible scenario to the center of the risk-preference assessment. This method involves asking participants to state the minimum returns they are willing to accept given a portfolio comprising a safe and a risky prospect. The stated minimum returns are a measure of risk preference. We observe that this measure correlates well with existing measures of risk preference, has high test–retest reliability while capturing high response variation, and predicts investments in stock or mutual funds.

Suggested Citation

  • Ranganathan, Kavitha & Lejarraga, Tomás, 2021. "Elicitation of risk preferences through satisficing," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
  • Handle: RePEc:eee:beexfi:v:32:y:2021:i:c:s2214635021001143
    DOI: 10.1016/j.jbef.2021.100570
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    1. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).

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    More about this item

    Keywords

    Risk preference; Risk attitude; Elicitation; Satisficing; Asset allocation;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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