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Assessing the Construct Validity of Risk Attitude

  • Joost M.E. Pennings


    (Wageningen University, Department of Social Sciences, Marketing ... Consumer Behavior Group, Hollandseweg 1, 6y06KN Wageningen, The Netherlands, and University of Illinois at Urbana-Champaign, Department of Agricultural ... Consumer Economics, Urbana, Illinois 61801)

  • Ale Smidts


    (Rotterdam School of Management, Erasmus University Rotterdam, The Netherlands)

Two major approaches to measuring risk attitude are compared. One, based on the expected utility model is derived from responses to lotteries and direct scaling. The other measure is a psychometric approach based on Likert statements that produces a unidimensional risk attitude scale. The data are from computer-assisted interviews of 346 Dutch owner-managers of hog farms, who made decisions about their own businesses. While the measures demonstrate some degree of convergent validity, those measures based on lotteries were better predictors of actual market behavior. In contrast the psychometric scale showed more agreement to selfreported measures of innovativeness, market orientation, and the intention to reduce risk. In light of the higher predictive validity of lottery-based measurements, werecommend elicitation methods based on the expected utility paradigm.

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Article provided by INFORMS in its journal Management Science.

Volume (Year): 46 (2000)
Issue (Month): 10 (October)
Pages: 1337-1348

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Handle: RePEc:inm:ormnsc:v:46:y:2000:i:10:p:1337-1348
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  1. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-63, June.
  2. Elke U. Weber & Richard A. Milliman, 1997. "Perceived Risk Attitudes: Relating Risk Perception to Risky Choice," Management Science, INFORMS, vol. 43(2), pages 123-144, February.
  3. Kenneth R. MacCrimmon & Donald A. Wehrung, 1990. "Characteristics of Risk Taking Executives," Management Science, INFORMS, vol. 36(4), pages 422-435, April.
  4. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
  5. Ale Smidts, 1997. "The Relationship Between Risk Attitude and Strength of Preference: A Test of Intrinsic Risk Attitude," Management Science, INFORMS, vol. 43(3), pages 357-370, March.
  6. Cargill, Thomas F & Rausser, Gordon C, 1975. "Temporal Price Behavior in Commodity Futures Markets," Journal of Finance, American Finance Association, vol. 30(4), pages 1043-53, September.
  7. Sriraman Bhoovaraghavan & Ashok Vasudevan & Rajan Chandran, 1996. "Resolving the Process vs. Product Innovation Dilemma: A Consumer Choice Theoretic Approach," Management Science, INFORMS, vol. 42(2), pages 232-246, February.
  8. John W. Payne & Dan J. Laughhunn & Roy Crum, 1980. "Translation of Gambles and Aspiration Level Effects in Risky Choice Behavior," Management Science, INFORMS, vol. 26(10), pages 1039-1060, October.
  9. Paul J. H. Schoemaker, 1990. "Are Risk-Attitudes Related Across Domains and Response Modes?," Management Science, INFORMS, vol. 36(12), pages 1451-1463, December.
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