How Consideration of Future Consequences, Prior Gain or Loss, Personal Risk Profile, and Justification Affect Risk–Payoff Preferences

W. Eric Lee ()
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W. Eric Lee: Department of Accounting, University of Northern Iowa, Cedar Falls, IA 50614-0127, USA

JRFM, 2024, vol. 17, issue 2, 1-16

Abstract: This study examines (1) how risk–payoff preference can be affected by differences in consideration of future consequences (CFC), prior gain/loss, and personal risk profile, and (2) whether one’s risk–payoff preference may vary with justification prompts. Using an experimental design with 366 undergraduate business students, participants are tasked to make risk–payoff choices in two scenarios, with the combined risk–payoff outcomes serving as the dependent variable. In addition, participants are assessed on their personal risk profiles and also complete the 14-item CFC scale to gauge the propensity to take into account future consequences of their behaviors. Findings show that one who scores low (high) in CFC will prefer lower (higher) risk and payoff. Further, for an individual who scores high in CFC and has a prior gain (loss), he/she will be more inclined to prefer lower (higher) risk and payoff, though this effect is moderated by one’s risk profile. Finally, justification prompts help to reduce one’s propensity toward high risk–payoff, irrespective of prior gain/loss and risk profile considerations. With regard to consumers’ financial choices, particularly in a volatile economic environment, the findings here indicate that prompting for strategic justifications before making decisions can help lower one’s overall propensity toward high risk–payoff choices.

Keywords: consideration of future consequences; prior gain or loss; personal risk profile; justification; payoff (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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