TI Complexity seminar Jürgen Huber (University of Innsbruck)
'What Drives Risk Perception? A Global Survey with Financial Professionals and Laymen'
Despite extensive research on decision making under risk, only little is known on how financial risks are actually perceived, particularly by financial professionals, who are key players in global financial markets. In a large-scale experiment with 6.936 financial professionals and laymen from nine of the largest nations (representing more than 50% of world population and more than 60% of world GDP) we exposed participants to return distributions with equal expected return and systematically varied the second (variance), third (skewness) and fourth (kurtosis) moments. Strikingly, although variance is the most common risk measure in finance, it had little to no explanatory power for professionals’ perception of risk. Skewness and, to a lesser extent, kurtosis had some explanatory power, but the strongest predictor was the probability to experience a loss. Our results hold equally for financial professionals and laymen and also across countries on five continents with different cultural backgrounds.