Dollar Equivalence: Alternative Approach for Measuring Risk Preference

Abstract

This study proposes an alternative measure of people’s risk preference based on Dollar Equivalence (DE). With reference to Probability Equivalence (PE) which is another, more well-known measurement for risk preference, DE can be considered to be the reverse of PE. In the context of DE, a certain amount of money should be stated by people when measuring their risk preference, while PE requires the subject to make a measure of probability. To illustrate and draw a conclusion on the effectiveness of DE, the study investigates the connection between financial knowledge, risk preference, and financial risk-taking behavior in situations of financial investment. This study relies on an online experiment where the results are taken from 446 participants who opted in, providing answers via a questionnaire. Furthermore, in order to create a control environment for the investment in which the external factor of risk warning can induce a change in a person’s investment decision, an investment disclaimer or Risk Warning Statement (RWS) was randomly presented to roughly half of the participants. Comparison of the results for the two groups of people could then be used to show how the measures could gauge a shift in financial investment behavior.