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Can self-assessed financial risk measures explain and predict bank customers’ objective financial risk?

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  • Hermansson, Cecilia

Abstract

This paper evaluates risk preference measures by contrasting subjective or self-assessed risk with objective risk, as implicated by bank customers’ actual portfolio allocation. Using a detailed data set of 7,234 bank customers, we find that subjective risk measures can explain and predict objective risk, but that the relationship is relatively weak. Subjective measures that uses survey questions about the customers’ trade-off between risk and return is a better measure than the hypothetical lottery for explaining objective risk. Both measures are relatively weak at predicting objective risk, but perform better than using a naïve model. We also find that multiple-item variables are somewhat better than single-item variables for explaining objective risk.

Suggested Citation

  • Hermansson, Cecilia, 2018. "Can self-assessed financial risk measures explain and predict bank customers’ objective financial risk?," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 226-240.
  • Handle: RePEc:eee:jeborg:v:148:y:2018:i:c:p:226-240
    DOI: 10.1016/j.jebo.2018.02.018
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk preferences; Elicitation methods; Household survey; Household finance;

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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