A Simplified Measure of Investor Risk Aversion

John Grable, Eun Jin Kwak, Martha Fulk and Aditi Routh

Journal of Interdisciplinary Economics, 2022, vol. 34, issue 1, 7-34

Abstract: This article introduces a simplified measure of investor risk aversion. The singleitem question combines elements from revealed preference and propensity measurement techniques in a way that matches traditional constant relative risk-aversion estimation procedures. Based on survey data from 500 investors living in the United States, scores from the proposed measure were found to correlate with other measures of risk aversion, as well as with indicators of risk-taking. A validity test showed that answers to the proposed measure were statistically associated with equity and cash ownership holdings in respondent portfolios. The simplicity and intuitive nature of the proposed measure and the alignment of question response categories to estimates of constant relative risk aversion make this a potentially valuable addition to the toolkit of researchers, financial educators, investors and those who provide advice to investors. JEL: C83, D10, D11, D14, D19, D81

Keywords: Risk aversion; revealed preference; psychometrics; risk tolerance; financial planning (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:sae:jinter:v:34:y:2022:i:1:p:7-34

DOI: 10.1177/0260107920924518

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