Previously Encountered Options Affect Risky Decisions in Choices Between Pension Funds

Abstract

The evidence that available options influence risk preference raises concerns about using risk attitude measures to guide investment choice.A between-participants test found those who first made choices between high (low) risk pension funds subsequently preferred higher (lower) risk funds when offered a choice from a larger range of funds.A within-participants test, with a fourteen-day break between conditions, found the same participants selected a lower risk fund after they experienced making choices between low risk funds, than they did after they experienced making choices between high risk funds.Effects were not influenced by order, or attenuated by a bias warning.Results are consistent with theories that suggest risky decision making involves similar processes to those involved in psychophysical perception (e.g.Decision by Sampling), although there was also evidence of sensitivity to absolute values.From an applied perspective, customers' risk preferences are susceptible to manipulation.

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