Risk preference is a relatively stable personality trait

Large-scale study casts light on the nature of risk preferences

People differ in their willingness to take risks. An individual’s propensity for risk taking can also vary across domains. But new research has shown that — akin to the general Intelligence Quotient (IQ) — there is also a general factor of individual risk preference, which remains stable over time. Importantly, that factor cannot be assessed by conventional behavioral tests, which often yield contradictory results. The findings of the research conducted at the University of Basel and the Max Planck Institute for Human Development have been published in the journals Science Advances and Nature Human Behaviour.

People who are willing to take risks in their leisure activities will also take more risks in other areas of their lives. © Jason Jacobs/flickr, CC BY 2.0 People who are willing to take risks in their leisure activities will also take more risks in other areas of their lives. © Jason Jacobs/flickr, CC BY 2.0

Should I invest my money on the stock market or leave it in my savings account? Have surgery or not? Take drugs or live a healthy lifestyle? All these decisions have consequences and involve risks. But what is the nature of the risk preference driving risk-related decisions? Does people’s willingness to take risk depend on the context or is it largely consistent across situations? According to findings from the large-scale Basel–Berlin Risk Study, both are correct. The study was conducted at the Max Planck Institute for Human Development and the University of Basel, with additional funding from the Swiss National Science Foundation.

“Our findings indicate that risk-taking propensity has a psychometric structure similar to that of psychological personality characteristics. Like the general factor of intelligence, there is also a general factor of risk preference. In other words, your willingness to take risks may vary across different areas of your life, but it will always be affected by the underlying general factor of risk preference,” says lead author Renato Frey, researcher at the University of Basel and adjunct researcher at the Max Planck Institute for Human Development. Backing up this idea, the study’s findings show that individuals’ general factor of risk preference remains stable over time.

In contrast to previous studies, most of which used just one or a few selected measurement instruments, the researchers used three distinct approaches to assess the risk preferences of 1,507 adults aged between 20 and 36 years. Specifically, they collected self-reports of risk-taking propensity in hypothetical scenarios, ran experimental behavioral tests involving financial incentives, and asked participants about their actual risky activities in everyday life. Study participants completed a total of 39 tests over the course of a day. To examine the stability of risk preference over time, the researchers had 109 participants repeat the tests after six months.

An important finding of this study is that the hypothetical scenarios and the reports on actual risk-taking behavior both painted a similar picture of individuals’ risk preferences. The picture emerging from the experimental behavior tests was rather different, however, revealing substantial inconsistencies between the tests. A detailed analysis of these inconsistencies revealed that participants’ decision-making strategies and behavior differed markedly depending on the characteristics of the behavioral task—whether it presented participants with risks in the context of a game, for example, or in more abstract form. “These results show that behavioral tests, which tend to be the preferred approach of economists, often give an inconsistent picture of people’s risk preferences that is difficult to explain with unified theories of risk behavior,” says Jörg Rieskamp, Director of the Department of Economic Psychology in the University of Basel’s Faculty of Psychology.

The results are of both methodological and theoretical importance. “Our work is a wake-up call for researchers, who need to think twice about the various measurement traditions. In particular, there needs to be a better understanding of what exactly the behavioral tasks measure. It seems clear that they don’t assess risk preference across situations. But our finding of a general factor of risk preference — based on self-reports and frequency measures of actual risky activities — suggests that risk preference is a personality characteristic in its own right. This insight will make it possible to examine the biological underpinnings of risk preference in future studies,” says Ralph Hertwig, Director of the Center for Adaptive Rationality at the Max Planck Institute for Human Development.