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Risk Information and Retirement Investment Choices Under Prospect Theory

Elderly couple researching pension options

Hazel Bateman, Andy Lai, and Ralph Stevens

We assessed alternative presentations of investment risk using a discrete choice experiment which asked subjects to rank three investment portfolios for retirement savings across nine risk presentation formats and four underlying risk levels. Using Prospect Theory utility specifications we estimate individual-specific parameters for risk preferences in gains and losses, loss aversion, and error propensity variability.

Our results support presentations that describe investment risk using probability tails. Risk preferences and error propensity were found to vary significantly across sociodemographic groups and levels of financial literacy.

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