Risk aversion

Jump to: navigation, search


Read First

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. Three survey-based approaches have been widely used to measure risk preference: self assessment, hypothetical lotteries, and income prospect choices.

Guidelines

Self Assessment

Households were surveyed about their general willingness to take risks on a scale. Carole Treibich provided respondents a scale ranging from 0 "I am not ready to take risks at all" to 7 "I am fully ready to take risks" in his study.Carole inverse the scale so that the lowest value corresponds to a risk lover and the highest value to the most risk-averse individuals. And any individual who has a score above 4 can be defined as risk averse.

Hypothetical Lottery

Income Prospect Choices

Back to Parent

This article is part of the topic Questionnaire Design


Additional Resources