On the (Ir)Relevance of Monetary Incentivization in Risk Preference Elicitation Experiments

Topic and Objectives

In this project, we use a systematic, large-sample approach with three different subject populations (students, private investors, and professional fund managers) to test the relevance of monetary incentivization in the most commonly used experiments for eliciting economic risk preferences. Measuring risk preferences plays a crucial role in the interaction between banks and their private clients. The Markets in Financial Instruments Directive (MiFID) by the European Parliament and the European Council (2004 and 2006) requires investment firms to obtain “information as is necessary for the firm to understand the essential facts about the customer” (Article 35, 1) and to elicit the customer’s “preferences regarding risk taking, his risk profile, and the purpose of the investment” (Article 35, 4). However, MiFID provides no guidelines about how or how often investment advisors need to elicit risk preferences and risk profiles, and what “essential facts about the customer” should be collected. With our data that also contains observations on the true portfolio holdings of our subjects, we can show how well incentivized and/or unincentivized tasks predict real-world behavior.

Key Findings

• We find no systematic differences in behavior between and within subjects in the incentivized and non-incentivized regimes.
• We discuss implications for academic research and for applications in the field. 

Policy Implications

• A policy-relevant side result of the project is that the simple ways currently used by most banks to elicit the risk preferences of their clients match those clients’ self-reported measures of stock ownership and equity shares quite well.