Risk aversion

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Preference towards risk are likely to affect individual decision-making, such as investment, purchase of health care and job change. People who care more about risk and are willing to do more to reduce their exposure to risk than others, are called "risk averse". A highly risk averse villager will likely manage livelihood activities more conservatively than a neighbor who's more willing to take risks. In the field of development economics, risk preference plays an important role to understand economic development process because it influences individual behavior directly and thereby shapes various economic outcomes. "In the context of low income countries, an individual's risk aversion is often mentioned as a possible explanation for the lack of entrepreneurship or the technological innovation delays maintaining individuals in poverty and impeding growth and development.(Cardenas and Carpenter, 2008) " However, risk preference measurement is a difficult challenge. One reason is that risk tolerance could be a domain-specific trait. Therefore, one method that has been proven to predict people's financial behavior may not be effective in health domain. Another concern is that choices made in hypothetical situations may not reflect actual behaviors when real money is at stake.

Guidelines

• There are mainly 3 survey-based approaches to measure risk preference: self assessment, hypothetical lotteries, and income prospect choices.

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This article is part of the topic Questionnaire Design

Additional Resources

• Gender and Risk Aversion: https://wol.iza.org/articles/gender-differences-in-risk-attitudes