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

Project Start:07/2020
Researchers:Andreas Hackethal, Michael Kirchler, Christine Laudenbach, Michael Razen, Annika Weber
Category: Household Finance
Funded by:SAFE

In this project, we use a systematic, large-sample approach with three different subject populations (students, private investors, 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 also a crucial role for the interaction of 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.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
286Andreas Hackethal, Michael Kirchler, Christine Laudenbach, Michael Razen, Annika WeberOn the (Ir)Relevance of Monetary Incentives in Risk Preference Elicitation Experiments2020 Household Finance Risk Preferences, Incentives, Experimental Economics, Risk Aversion