Elicitation of Risk preferences through satisficing

Ranganathan, Kavitha and Lejarraga, Tomás (2021) Elicitation of Risk preferences through satisficing. Journal of Behavioral and Experimental Finance, 32. pp. 1-11.

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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.

Item Type:	Article
Uncontrolled Keywords:	Risk preference; Risk attitude; Elicitation Satisficing; Asset allocation
Subjects:	Finance Finance > Capital Markets/Stock Marketing
Divisions:	Finance and Strategy
Depositing User:	Mr. Muralidhara D
Date Deposited:	26 Oct 2021 15:16
Last Modified:	26 Oct 2021 15:16
URI:	http://tapmi.informaticsglobal.com/id/eprint/756

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