IZA DP No. 13723: How People Know Their Risk Preference
published in: Scientific Reports, 2020, 10, No. 15365
People differ in their willingness to take risks. Recent work found that revealed preference tasks (e.g., laboratory lotteries)—a dominant class of measures—are outperformed by survey-based stated preferences, which are more stable and predict real-world risk taking across different domains. How can stated preferences, often criticised as inconsequential "cheap talk," be more valid and predictive than controlled, incentivized lotteries? In our multimethod study, over 3,000 respondents from population samples answered a single widely used and predictive risk-preference question. Respondents then explained the reasoning behind their answer. They tended to recount diagnostic behaviours and experiences, focusing on voluntary, consequential acts and experiences from which they seemed to infer their risk preference. We found that third- party readers of respondents' brief memories and explanations reached similar inferences about respondents' preferences, indicating the intersubjective validity of this information. Our results help unpack the self perception behind stated risk preferences that permits people to draw upon their own understanding of what constitutes diagnostic behaviours and experiences, as revealed in high-stakes situations in the real world.