Investment Risk Framing and Individual Preference Consistency

Abstract

Here we test the usefulness of a discrete choice experiment (DCE) for identifying individuals who consistently exhibit concave utility over returns to wealth, despite variations in the framing of risk. At the same time, we test the relative strengths of nine standard descriptions of investment risk. We ask a sample of 1200 retirement savings account holders to select their most and least preferred investment strategies from a menu of a safe (zero risk) savings account, a risky growth asset portfolio and a 50:50 share of both. We identify respondents who fail to conform with expected utility and test whether this behavior is predictable across different risk frames. Tests confirm that the DCE can help isolate individuals whose preferences violate global risk aversion despite variation in risk presentation. We also identify frames linked to significantly more consistent behavior by respondents. These are frames which simultaneously specify upside and downside risk. Frames that present risk as a frequency of failures or successes against a zero returns benchmark are more likely to generate violations of risk aversion.