An analysis of risk assessment questions based on loss-averse preference

Abstract

A variety of risk assessment questionnaires are used within the financial planning profession to assess client risk preferences. Evidence indicates that the average person overweighs losses relative to an arbitrary reference point. This paper evaluated risk assessment questions on how well they correlate with monetary loss aversion. Twenty-fine West Texas residents between the ages of 27 and 56 filled out several risk assessment questionnaires and two weeks later their coefficients of loss aversion were measured using monetary gain and loss scenarios. The individual risk assessment questions were placed into three categories: expected utility theory, prospect theory and self-assessment. Composite measures were created for within-group and between-group comparisons. Statistically significant correlations were found between monetary loss aversion and different composite measures. The results provide financial planners with a group of risk assessment questions that capture loss-averse preferences.