Don’t like the picture? Change the frame: the impact of cognitive ability and framing on risky choice

Guillemette, Michael A.; Browning, Chris; Payne, Patrick

doi:10.1080/13504851.2015.1044643

Cited by 10 publications

(4 citation statements)

References 7 publications

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“…In essence, elicited preferences are what people say they prefer, whereas revealed preferences are what they actually prefer, as shown through their behaviours. To apply this concept in finance, elicited and revealed preferences for financial risk were developed, with focuses on estimating the utility of wealth of consumers based on their investing behaviour (Dybvig and Rogers, 1997), applications of prospect theory (Kahneman and Tversky, 2013), understanding the perceptions of risk (Diacon and Ennew, 2001), the effect of cognitive ability on risk preferences (Guillemette et al, 2015), and-the focus of this paper-measuring risk preferences.…”

Section: Behavioural Finance: Elicited and Revealed Riskmentioning

confidence: 99%

“…In conjunction with the conversations surrounding the questionnaire, the responses to the questionnaire are used to calculate risk preferences. Finke and Guillemette (2016) provides a modern review of eliciting risk tolerance from questionnaires; their summative findings include measuring choices surrounding income risk and volatility to assess risk tolerance (Guillemette et al, 2012), financial literacy effects on risk assessment (Linciano and Soccorso, 2012), and emotional responses to risk and loss aversion (Loewenstein et al, 2001;Grable and Lytton, 2001;Michael et al, 2015). Wahl and Kirchler (2020) employed a modern questionnaire methodology that measures risk propensity, attitude, capacity, and knowledge to elicit risk tolerance from clients.…”

Section: Behavioural Finance: Elicited and Revealed Riskmentioning

confidence: 99%

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Measuring Financial Advice: aligning client elicited and revealed risk

Thompson¹,

Li²,

Reesor³

et al. 2021

Preprint

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Financial advisors use questionnaires and discussions with clients to determine a suitable portfolio of assets that will allow clients to reach their investment objectives. Financial institutions assign risk ratings to each security they offer, and those ratings are used to guide clients and advisors to choose an investment portfolio risk that suits their stated risk tolerance. This paper compares client Know Your Client (KYC) profile risk allocations to their investment portfolio risk selections using a value-at-risk discrepancy methodology. Value-at-risk is used to measure elicited and revealed risk to show whether clients are over-risked or under-risked, changes in KYC risk lead to changes in portfolio configuration, and cash flow affects a client's portfolio risk. We demonstrate the effectiveness of value-at-risk at measuring clients' elicited and revealed risk on a dataset provided by a private Canadian financial dealership of over 50, 000 accounts for over 27, 000 clients and 300 advisors. By measuring both elicited and revealed risk using the same measure, we can determine how well a client's portfolio aligns with their stated goals. We believe that using value-at-risk to measure client risk provides valuable insight to advisors to ensure that their practice is KYC compliant, to better tailor their client portfolios to stated goals, communicate advice to clients to either align their portfolios to stated goals or refresh their goals, and to monitor changes to the clients' risk positions across their practice.

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Section: Behavioural Finance: Elicited and Revealed Riskmentioning

confidence: 99%

Section: Behavioural Finance: Elicited and Revealed Riskmentioning

confidence: 99%

Measuring Financial Advice: aligning client elicited and revealed risk

Thompson¹,

Li²,

Reesor³

et al. 2021

Preprint

View full text Add to dashboard Cite

show abstract

“…Previous studies have investigated the relationship between framed information in terms of loss or gain and participation in various activities [32–36]. Framed information in a risky situation has also attracted the interest of a number of scholars [37–42]. However, few studies have focused on the effects of information packaging way on the framing effect.…”

Section: Theory and Hypotheses Developmentmentioning

confidence: 99%

Public engagement with firms on social media in China

Wei

Jia

Zhao

2015

Journal of Information Science

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An increasing number of companies use social media such as micro blogs to promote celebrities in Internet communities. Companies may run their official micro blogs differently, which in turn leads to different public engagements on micro blogging sites. This study takes a perspective on the adoption behaviours of micro blogs in enterprises by looking at the relationship between media frame and audience frame based on the China Fortune 500 firms in 2014. The results show that the updates, active days and followings are associated with public engagement with the corporate official micro blogs. In particular, we found information overload from information updates. The marginal utility of the public engagement decreases as number of updates increases. The results also show that the daily variance of updates has a significant influence on the audience frame.

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“…In essence, elicited preferences are what people say they prefer, whereas revealed preferences are what they actually prefer, as shown through their behaviors. To apply this concept in finance, elicited and revealed preferences for financial risk were developed, with focuses on estimating the utility of wealth of consumers based on their investing behavior (Dybvig & Rogers, 1997), applications of Prospect Theory (Kahneman & Tversky, 2013), understanding the perceptions of risk (Diacon & Ennew, 2001), the effect of cognitive ability on risk preferences (Guillemette et al, 2015), and–the focus of this paper–measuring risk preferences.…”

Section: Introductionmentioning

confidence: 99%

Measuring the gap between elicited and revealed risk for investors: An empirical study

et al. 2022

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Financial advisors use questionnaires and discussions with clients to determine investment goals, elicit risk preference and tolerance and establish a suitable portfolio allocation for different risk categories. Financial institutions assign risk ratings to their financial products. Advisors use these ratings to categorize products into the same risk categories used for portfolio allocation.Subsequently, clients select a portfolio of assets whose risk profile we call revealed risk. This paper proposes a novel methodology for comparing an individual's elicited and revealed risk. We propose using Value-at-Risk to measure elicited and revealed risk and the discrepancy between them, showing whether clients are over-risked or under-risked. We demonstrate the methodology using a dataset from a Canadian private financial dealer. We find that elicited risk is consistently higher than revealed risk-advisors build a safety buffer into their recommendations-and elicited risk varies with respect to demographic features and trading behaviors in expected ways-investors are receiving sound advice. This risk discrepancy could be used, for example, to gauge the quality of financial advice an individual is receiving, or it could be used to help advisors communicate inconsistencies between client trading actions and client goals. Our methodology falls into the interest realms of advisors, regulators, and dealerships.

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Don’t like the picture? Change the frame: the impact of cognitive ability and framing on risky choice

Cited by 10 publications

References 7 publications

Measuring Financial Advice: aligning client elicited and revealed risk

Measuring Financial Advice: aligning client elicited and revealed risk

Public engagement with firms on social media in China

Measuring the gap between elicited and revealed risk for investors: An empirical study

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