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Testing the validity of the prospect relativity principle in real

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					                       Consumer Risk Project

                              Fifth Report



                        Ivaylo Vlaev & Nick Chater

                       Decision Technologies Group

    Department of Psychology, University of Warwick, Coventry, CV4 7AL,

United Kingdom, email: ivaylo.vlaev@psy.ox.ac.uk, nick.chater@warwick.ac.uk
       This report presents two related studies. The first study investigates how much
the context affects how people make financial decisions, while the second study will
investigate consumers’ understanding of financial risk related to retirement savings and
investment.



                                         STUDY I

  Testing the validity of the prospect relativity principle in real financial decision

                                       making task



       The goal of this experimental study was to make a provisional estimate of the
degree to which the kinds of effects that are revealed in the pilot data could be
applicable to real financial advice contexts. Key issues include: How does the range of
options people choose between affect the level of pension investment they choose?
How does the range of options people choose between affect the level of risk they
accept with that investment? The full experimental study followed the design of
Experiment 1 in the pilot study, but modified in a number of ways, to increase
relevance to real-world financial advice:
       In particular, we run the experiments with the following modifications and
elaborations of the design:
       1) The study was conducted on a sample of working people, rather than
university students (this was not, though, a large or broad enough sample to be fully
representative of the population at large). In other words, we used sample of
participants who are more realistic to be consumers of financial advice than the student
population used in our studies (e.g., people who are already working, have a family,
and need to save for retirement pension provision).
       2) The financial outcome options (e.g., expected annuity values) were calculated
using more plausible financial assumptions (like inflation, risk free rate, risk premium
rate, etc.) when creating the test materials, and also we changed some of the
descriptions of the risky assets (e.g., not explicitly mentioning the types of the assets
like bond or equities, and also not offering any form of guaranteed return).
       3) In the light of the important discussion raised at our meetings, we took
account of financial affordability, as a constraint on people's choice of pension. We
created a financial affordability test, which categorised people according to their
individual financial circumstances and then measured whether the context effects are of
the same magnitude as in the pilot tests with students. Additional purpose of the
financial affordability test was to make the experimental situation look more realistic
for the participants by asking them concrete questions about their real life financial
circumstances and problems. Thus by explicitly focusing their attention on their real
life struggles at the beginning of the experimental session, we expected people to
provide more adequate and valid responses to our saving and investment questions.
                          Financial Affordability Questionnaire
       The financial affordability questionnaire is presented in Appendix A and it has
the following features:
       a) Question 2 asks people to estimate to what extend their current income
(question 1) is sufficient to cover their necessities and to judge in percentage term
whether, and by how much, this income is sufficient or insufficient to cover their
expenses (e.g., I would be happy to earn around 20% more than my current salary). The
participants also had to indicate how much they are able to save at the moment
(question 3).
       b) In question 4, the participants were provided by a list of various types of
spending and they had to answer how much of their current income is spend on each of
these expenditures. In general, there were two types of expenditure examples –
discretionary (e.g., leisure activities) and essential ones (e.g., food and rent) and we
asked people to give estimates of their expenditure across these categories.
       c) Question 6 asks people whether they can give up some of their discretionary
spending in order to increase their savings. Here the focus again was on the amount and
type of current saving and discretionary spending, and hence the degree to which
people can readily reallocate money towards a pension. Here we also aimed to test how
important and essential some these discretionary expenditures are (e.g., some people
might be unwilling to give up some types of social life, hobbies, sport activities, etc.).
Participants were also informed that at the and of the experimental session if their
average preferred savings rate is above their current savings as indicated in question 3,
then they had to readjust some of their expenditures in question 4 so that to be able to
provide the additional capital that is the lacking difference between their current and
savings and the one indicated in the second part (in addition, question 5 separately
asked what is the maximum amount that they would like to save per year).
                                 Prospect Relativity Test
       This experiment followed a similar logic to Stewart, Chater, Stott, & Reimers

(2003) decision experiment, which was itself inspired by Garner's (1954) loudness

judgment experiment. In various questions, the participants in our study were asked to

select among a predefined set of values related to five variables: (a) the desired

percentage of the annual income that will be saved for retirement, (b) the investment

risk expressed as the percentage of the saving that will be invested in risky assets, (c)

retirement age, (d) expected retirement income, and (e) possible variability of the

retirement income.

       There was a control condition called a free choice condition, in which the

participants had to freely decide the value of each one of these variables selecting from

the full range of options. In two context conditions, participants were asked to select

these values from sub-ranges of the set of options offered by the experimenter in the

free choice condition. Thus, there were three between-participant conditions in the

experiment presented here, i.e., with separate groups for the free choice, low range, and

high range conditions. In the free choice condition, all options were presented. In two

other conditions, the choice of prospects was limited to either the first or second half of

the prospects available in the free choice condition, so that the participant in the high

range condition were presented with a range of values the lowest of which coincides

with the highest option in the low context condition. In the control condition for saving

the options were presented in monetary terms and varied from 2% to 22% of the

hypothetical salary (£25,000) increasing with 2% between the options; so there were

eleven options to choose among, while the low range condition spanned from 2% to

12% and the high range condition was from 12% to 22%. The same design was applied

for the other choice variables in the test. The values in the free choice condition for the

other four key variables were the following. For investment risk the options varied from
0% to 100% and were increasing with 10% between the choice options. For retirement

age the options were varied from 48 to 68 increasing with 2 years between the choice

options. Table 1 presents the values for savings, risk, and retirement age in the three

conditions. For the retirement income and its variability, the values were different for

every question depending on the combination of saved amount, investment risk, and

retirement age.

Table 1. Figures for saved amount (£), investment risk (%), and retirement age in the
three conditions of Experiment 1
        Free Choice                  High Range                     Low Range
 Save        Risk      Retire     Save       Risk      Retire     Save      Risk      Retire
  500         0         48        500         0         48
 1,000        10        50       1,000        10        50
 1,500        20        52       1,500        20        52
 2,000        30        54       2,000        30        54
 2,500        40        56       2,500        40        56
 3,000        50        58       3,000        50        58       3,000       50         58
 3,500        60        60                                       3,500       60         60
 4,000        70        62                                       4,000       70         62
 4,500        80        64                                       4,500       80         64
 5,000        90        66                                       5,000       90         66
 5,500       100        68                                       5,500       100        68



         If a participant is not influenced by the set of options, then his or her choice of

each value in the high and low range conditions should be independent of the other

values in the set and the chosen values should be the nearest to his or her free choice.

The key prediction is that if people are not influenced by the context (i.e., the other

available options), then the lowest option in the high range condition should not be

chosen significantly less often than the same option plus other options lower than it in

the free choice condition (i.e., the options that are missing in the high range condition).

In other words, the proportion of times the lowest option in the high range condition
was selected should not be less than the total proportion of times the same option plus

some other bellow it was selected in the free choice condition. This is because we

assume that if people’s true preferences are represented by the results in the free choice

condition, and their choices are not influenced by the context in the high range

condition, then all participants that truly prefer the middle option (i.e., the one that is

also the lowest option in the high range condition) or some option bellow it in the free

choice condition would choose the lowest option in the high range condition. If the

lowest option in the high range condition is selected less of the time than the same

option plus some option below it in the free choice condition, then this result should be

due to the effects of the choice set in the high range condition. In other words, the

choice set is affecting the responses and inducing people to select higher options than

they would have selected if they were in the free choice condition. The same logic

applies for the low range condition. The key prediction there is that if people are not

influenced by the context (i.e., the other available options), then the highest option in

the low range condition should not be chosen less of the time than the same option plus

some option above it was selected in the free choice condition (some option above

means every option in the free choice condition, which was missing in the low range

condition).

        Alternatively, if participants' responses are solely determined by the set of

options presented to them, then the distribution of responses across options should be

the identical for both the low and the high range conditions (and there will not be a

tendency towards the distribution of responses in the free choice condition).

Method

        Participants. There were 24 men with average age 36.5 and 40 women with

average age 37. The Low Range Condition had 20 participants: 7 men (av. age 37) and
13 women (av. age 38); the Free Choice Condition had 21 participants: 9 men (av. age

33) and 12 women (av. age 36); and the High Range Condition had 23 participants: 8

men (av. age 40) and 15 women (av. age 36).

         Design. The questions were formulated as long-term saving/investment decision

tasks related to retirement income provision. The participants had to make decisions

about five key variables. These variables were the saved proportion of the current

income, the risk of the investment expressed as the proportion invested in risky assets,1

the retirement age, the desired income after retirement, and the preferred variability of

this income (variability is due to favourable and respectively unfavourable economics

conditions).

         The experimental materials were designed as 10 independent hypothetical

questions, in which we varied each of the five key variables. However five of the

questions focused only on savings while the other five questions focused on risk and

some questions showed how changing savings or risk would affect another variable or

set of variables. For example, how changing the investment risk can affect the projected

retirement income and its variability - with higher risk offering higher expected income

on average, but also wider spread of the possible values.2 As an example here is a

question in the free choice condition, in which the participants were asked to choose


1
  There are various types of risky assets, like bonds and equities for example, but in reality these various
investment vehicles differ mainly in their risk-return characteristics. Therefore, we simply described the
characteristics of these two assets – the High Risk Asset and the Low Risk Asset, rather than labelling
them explicitly as bonds and equities, although while setting the basis so that it is not out of line with
typical assumptions made about actual assets. This aimed to avoid some of the potential challenges that
might otherwise result and which could draw attention away from the results.
2
  In order to derive plausible figures for the various economic variables we implemented a simple
econometric model into a spreadsheets Monte Carlo simulator that calculates the likely impact of
changes in each variable on the other four variables. For example, this model can derive what retirement
income can be expected from certain savings, investment risk, and retirement age, or what are the
possible potential investment options that could lead to the preferred retirement income. The sort of basis
the professional actuaries suggested was 2.5% for Inflation, 1.5% real return on Low Risk asset, 4.5%
real return on High Risk asset, and 15% annual volatility. Note also that all figures are in pounds and the
participants knew this. It is important to stress that all figures shown were in today's money terms (i.e.
after taking out the effects of inflation). This is important when comparing figures for different
retirement ages.
their preferred level of investment risk by selecting one of the rows in the table bellow

(note that in this format the key variable is in the first column of the table bellow while

the other columns are showing the effects on the other variables like the minimum,

average, and maximum retirement income shown here3):

Assume that you will retire at 65 and decided to save 11 percent of your current salary (£2750)
in order to provide for your retirement income. The following options offer different ranges of
retirement income (in pounds) depending on the percentage of your savings allocated to shares
(in the stock market) and you can see the effects on the expected average retirement income and
its variability (minimum and maximum). Note that you are very likely (have 95% chance) to be
between the minimum and maximum figures indicated in the table below. Please select one of
the following options.

                Invest             Minimum                Average              Maximum
                  0%                16,000                16,000                 16,000
                 10 %               17,000                19,000                 22,000
                 20 %               17,000                21,000                 23,000
                 30 %               17,000                23,000                 29,000
                 40 %               16,000                26,000                 35,000
                 50 %               15,000                29,000                 42,000
                 60 %               14,000                33,000                 51,000
                 70 %               11,000                37,000                 62,000
                 80 %                7,000                41,000                 76,000
                 90 %                2,000                47,000                 92,000
                100 %                  0                  53,000                112,000


         The high range condition was derived by deleting the lower five rows of the

table for each question in the control condition and the low range condition was derived

by deleting the higher five rows in the tables in the free choice condition (i.e., the same

was done for each question). Therefore in the free choice condition the participants had

to choose among eleven possible answer options for each questions while in the high

and low range conditions there were only six available answer options.



3
  Most of the questions showed the expected retirement income and its variability like in the example
above. The possible variability of the retirement income was explained by referring to the 95% and
respectively 5% confidence intervals of the income variability, i.e. maximum and minimum possible
values of the income, for which there is 5% chance to be more than the higher or less than the lower
value respectively. On each row of the table these two values were placed on the both sides of the
average expected retirement income. The confidence intervals were expressed also in verbal terms using
the words very likely. For example, the participants were informed that it is very likely (95% chance) that
their income will be below the higher value and above the lower value, and that these two values change
depending on the proportion of the investment in equities.
       The ten questions were presented in different order in the various conditions. In

Appendix B there is a detailed description of each question and its purpose (the

questions are grouped by the key variable that participants are asked to select – savings

or investment risk).

       Note that since we use mature population of participants who vary in age, this

might create problems with test materials that are designed in advance, because for

people that are relatively older the saving options that are calculated with longer time

horizon of the investment are very attractive---they will have so save for much less

number of years compared with younger people to get the same retirement income, and

hence they would prefer the higher options. The materials in the pilot study were

created for people with average age of around 25 yrs, and if we give the same materials

to somebody who is 50, then of course he would be happy to save the highest possible

amounts for the remaining 10-15 years until retirement, which on the top of that is

economically unfeasible (i.e., cannot be realistically accomplished). In order to avoid

this problem we decided to create test materials for three different age groups, namely,

30, 40, and 50. For people that are plus or minus 5 years around each age group we will

send the same test materials (e.g., the financial options calculated for somebody who is

30 will be also sent to people who are between 25 and 35 yrs old).

       Note that in this design the participant had to choose among predetermined

values in all conditions including the free choice one, which was similar to the design

used in Experiment 4 reported by Stewart et al. (2003), where in the free choice

condition the participants had to choose among predefined set of risky prospects

(gambles), while in the two context conditions they were asked to choose among

predetermined choice options that were either the higher halve or the lower halve of the

list of options offered in the free choice condition.
          Procedure. We sent the materials (the financial affordability questionnaire and

the savings and investment questionnaire) by post to a population of working

individuals. Since not many people are able to come to the lab during day time. We

targeted more than 600 people, but only 64 returned their answers and they were paid

£10 for their participation (received as a check after they have returned the answer

sheet).

          Participants were sent a booklet containing the financial affordability

questionnaire, the ten prospect relativity questions, and five questions measuring risk

aversion (see questions 11-15 in Appendix B). They received written instruction

explaining that the purpose of the experiment is to answer series of questions about

savings and investment related to retirement income provision, and that there were no

right and wrong answers and that they are free to choose whatever most suits their

preferences. It was explained that the choice options are predetermined because these

are the outcomes that can be realistically accomplished according to a standard

economic model and that the task is to choose the option that is nearest to the

participant’s preferences. The participants were also informed that if they find them

unsatisfactory then they can indicate values outside these ranges.

          The questions and the answer options were presented in the same way as the

example question and table presented above. The participants had to choose one of the

figures in the first column of the table (which were either savings or investment risk

values) and they were provided with a separate answer sheet on which to write their

answers. Participants were informed that their answers do not need to be consistent

between the questions, and that they can freely change their preferences on each

question and choose different savings and risk values.
       Another issue that we had to deal with was how to account for people’s existing

savings because we want to make our session as realistic as possible. If we give our

questions to somebody who already has got a good pension scheme then she/she might

choose very low saving amounts and investment risk just because she does not need to

save much more. On other side, if we tell them to imagine that our scheme is offering

them to start anew, then our calculation will have to include also their accumulated

savings up to date. This would also require some sophisticated software to be used

online with every individual (and which is probably used by the real financial advisors).

Our solution to this problem is write in the instruction that most people in UK are

underprovided and that we research what kind of pension top-up product people might

find attractive (in addition to the social security scheme), and therefore this is an extra

to what they already got.

Results

                         Financial Affordability Questionnaire

       Table 2 presents the results from the Financial Affordability Questionnaire. The

purpose of this questionnaire was mainly to force the respondents to give answers to the

prospect relativity test, which they would do if making these decisions for real.

Therefore, we will not try here to analyse the results from the financial affordability

questionnaire, although it is possible to divide the participants in groups depending on

their answers to the various questions and then see whether there are differences in the

context effects detected by the prospect relativity test.

Table 2. Results from the Financial Affordability Questionnaire
                  Question                          Mean                Std Deviation
              Annual income                        18,871                  15,298
        Spend less than you earn by                 3,758                   3,090
    Spend exactly the amount you earn              18,659                   8,730
       Spend more than you earn by                  1,634                   1,221
          Current annual savings                    1,823                   2,371
                                Essential expenditure
                     Food                             2,073              1,879
               Rent / Mortgage                        3,053              2,001
   Utilities (electricity, gas, water, etc.)           641                819
                      Car                             1,275              1,579
      Other transport (train, busses)                  342                671
               Debt repayment                         1,009              1,214
    Communications (telephone, etc.)                   404                301
          Childcare and Schooling                      277                739
                    Health                              73                106
         Repairs and Maintenance                       419                532
 Other (like health and life insurance, etc.)          409                475
        Total essential expenditure                    907                938
                                Discretionary expenditure
                   Holiday                             792                893
       Entertainment (e.g., cinema)                    323                383
                     Sport                             231                347
                   Hobbies                             184                220
              Meals and Drinks                         544                503
                     Other                             665               1,306
     Total discretionary expenditure                   456                609
         TOTAL EXPENDITURE                           10,357              6,581
 Maximum amount you would like to save                3,600              3,519
  Give up discretionary spending to save           Yes-54%             No-46%
                Employment                       Part-time 33%      Full-time 67%
                  Education                      School 6%, College 29%, Uni 65%
             Household Income                        30,974             33,595
                                                    Not at all 14%, Occasionally 28%,
       Time spend managing finances              Regularly 34%, Often 14%, Very often 9%



                                 Prospect Relativity Test

       Note that although the questions related to saving and to risk asked the

participants to trade-off different variables (e.g., savings versus retirement income in

one question, and savings versus risk in another question), we used the weighted

average of the answers of each participant across all five questions related to saving and

all five questions related to risk, in order to derive the mean values for saving and risk

in each condition; and these averaged results are presented here. This was done because

the results showed no difference (i.e., the general pattern was the same) across the five

questions for saving and risk respectively.
                Savings. The mean savings in the high range condition (£3,596) was

significantly higher than the free choice condition (£2,343), t(42) = 5.11, p < .0001,

while the mean savings in the low range condition (£1,660) was significantly lower

than the free choice (£2,343), t(39) = 2.26, p = .030. This indicates that the range of

offered options has strongly affected the mean of the selected values in each group.

                The proportion of times each saving option was chosen in the free choice, low

range, and high range conditions is plotted in Figure 1. The results were averaged over

all participants (which was also done for all statistical tests presented here). The error

bars represent the standard error of the mean, which is also presented in all other

figures here.


                      Figure 1. Proportion of times each saving option was chosen in the free
                                   choice, low range, and high range conditions

                0.9
                0.8
                0.7                                                                             Free Choice
                0.6
   Proportion




                                                                                                High Range
                0.5
                0.4                                                                             Low Range
                0.3
                0.2
                0.1
                0.0
                       2     4      6     8     10     12    14     16    18     20    22
                                                Percentage saved

                The proportion of times the lowest option in the high range condition (the 12%

option) was selected was .40 and was lower than .78 which is the proportion of times

the same option plus some other option bellow it was selected in the free choice

condition, t(42) = 4.37, p < .0001. This result indicates that the context has affected

choices in the high range condition. The proportion of times the highest option in the

low range condition (again the 12% option) was selected was .20 and this value was
lower than 0.41, which was the proportion of times the same option plus some other

option above in the free choice condition was selected, t(39) = 1.75, p = .088. This

result also means that the hypothesis that participants' choices were unaffected by

context should be rejected.

                Investment risk. The average investment risk was significantly higher in the

high range condition (56.1%) compared to the free choice condition (31.6%), t(42) =

9.35, p < .0001, and also the average investment risk in the low range condition

(22.9%) was significantly lower that in the free choice condition (31.6%), t(39) = 2.36,

p = .023. This result also indicates significant context effects on the mean risk preferred

in each condition.

                The proportion of times each investment risk option was chosen in the free

choice, low range, and high range conditions is plotted in Figure 2.


                      Figure 2. Proportion of times each investment risk option was chosen in the
                                   free choice, low range, and high range conditions


                0.9
                0.8
                0.7
   Proportion




                0.6                                                                            Free Choice
                0.5                                                                            High Range
                0.4
                0.3                                                                            Low Range
                0.2
                0.1
                0.0
                        0     10    20     30     40    50     60    70     80     90   100
                                            Percentage risky investment

                The proportion of times the lowest option in the high range condition (the 50%

option) was selected was .58 and this values was significantly lower than the proportion

of times the same option plus some other option bellow it was selected in the free

choice condition, which was .93, t(42) = 5.10, p < .0001. The proportion of times the
highest option in the low range condition (again the 50% option) was selected was .11

and this result was lower than .17 which was the proportion of times the same option or

some other option above it in the free choice condition was selected, although this

difference was not statistically significant, t(39) = .931, p = .358.

Discussion

        The results clearly demonstrate that the choices were strongly influenced by the

set of offered choice options. The non-significant difference between the low range

condition and the free choice condition can be explained simply by the fact that the

participants in the free choice condition naturally preferred low saving and risk rates.

The skewed results in the high range condition clearly show that there is a tendency

towards certain most preferred values for savings and risk. However, the choices were

still significantly affected by the context in the high range condition. This result

suggests that people’s preferences are not completely malleable by the context and

choices are not absolutely relativistic and context dependent as the prospect relativity

principle claims.

        Note that the motivation here was simply to check whether the prospect

relativity effect will appear when people are faced with familiar situations with which

they are likely to have some exposure and practice like saving, consumption, pension

plans, and investment in the capital markets (at least the media provides enough

information on the last issue). It seems that people might have developed some more

stable preferences or anchors for savings and investment risk, although their responses

are still malleable to context effects.

                                      Risk Preferences

        Table 3 presents the results from the five questions measuring respondents’ risk

preferences.
Table 3. Results from the risk preference questions
Question      Men       Women        Total                          Question
                                                     How much risk you are prepared to take?
1 (1 to 5)      2.5        2.4         2.4
                                                How much are you concerned about your financial
2 (1 to 5)      3.1        3.4         3.3                            future?
                                                Are you more or less willing to take risks than the
3 (1 to 5)      2.8        2.6         2.7                       average person?
                                                   Are you more or less concerned about your
4 (1 to 5)      3.0        2.9         3.0          financial future than the average person?
                                                 Question 5 ranks people on a increasing level of
5 (1 to 4)      2.5        2.4         2.4                  risk aversion from 1 to 4.

       The results show that there is not a major difference between males and females

in terms of their risk aversion. Questions 1, 2, and 5 clearly indicate that the

respondents were on average moderately risk averse. Questions 3 and 4 show that the

respondents perceive the other people as having similar attitudes to risk.
                                        STUDY II

Dimensionality of Risk Perception - investigation of consumers' understanding of

             financial risk related to retirement savings and investment.



       There have been several studies in the past examining people's understanding of

financial risk. Slovic (1972) examined the implications of research on human judgment

and decision-making for investment decisions. His review pointed to multiple

conceptualizations of risk that people apply to risk-taking situations, such as selections

of gambles, and he concluded that variance of returns, which is the standard approach,

is not a consistent predictor of risk-taking. He found that other decision rules, such as

maximizing possible gain or minimizing possible below-target return, also play a

central role in decision-making under uncertainty. Slovic's later research in risk

perception has identified a number of qualitative factors that contribute to perception of

risk, including the potential for large or catastrophic losses, unpredictability of

outcomes, knowledge or familiarity, and affective or emotional reactions (Slovic,

Fischhoff, & Lichtenstein, 1985; Slovic, 1987). Gooding (1975) also examined

investors' perceptions of the risks and returns of common stocks and found that

significant differences existed between financial professionals and non-professional

investors.

       More recent research on financial judgment has focused on psychological

factors that are associated with perceptions of risk and the quality of investments.

MacGregor, Slovic, Dreman & Berry (in press) examined the role that imagery and

affect play in financial judgment by studying how business students evaluate industry

groups of stocks. They found that images and affective ratings (like for example, good-

bad and strong-weak), were highly predictive of both anticipated industry-group returns
and the likelihood of purchasing an initial public offering within an industry group.

Olsen (1997) examined experts' and non-experts' perceptions of financial risk in a

survey of chartered financial analysts and individual investors who actively manage

their personal portfolios. He found that perception of risk in both groups of subjects

was multidimensional in nature, and included four factors: potential for large loss,

potential for below-target returns, the feeling of control, and the perceived level of

knowledge about an investment. However, perceptions of investment risk by non-

professionals were more sensitive to the potential for loss of principal.

       Much of this research has been conducted in what has come to be known as the

"psychometric paradigm," in which respondents evaluate each of a number of different

potential sources of risk in terms of a set of characteristics. MacGregor & Slovic (1999)

applied this general methodology to reveal the underlying factors that contribute to

professional financial judgment across a domain of possible investments. The aim was

to investigate how financial judgment is related to other properties or characteristics of

investments or asset classes, particularly perceptions of their risks, returns and

return/risk relationships. The study focused on professional financial advisors and

found out that while they tend to define risks for some asset types in terms price

volatility, which accords with the principles of classical economic theory, they (like

their clients) also embellished definitions of risk with other contextual factors that are

specific to particular investments (such as mutual funds versus blue chip stocks, or U.S.

Savings Bonds versus foreign bonds). Moreover, the financial advisors tended to

perceive risk not only in terms of market factors like the price variations, but also in

terms of the psychological burden associated with monitoring and evaluating an asset's

ongoing performance (the so called "worry or attention"), predictability of performance,

potential loss-of-capital risks, and perceived adequacy of regulation. Thus, financial
advisors appeared to perceive and respond to risk in multidimensional terms, similar to

those that previous research by Slovic (1987) has found lay people use in evaluating

other risks in life including health and safety.

                                   Aims and objectives

       None of the existing research has focused on people's understanding of financial

risk associated with investments related to retirement pension provision, and also none

of the discussed studies has been done with British population. Our study aimed to fill

these two gaps, which will also provide us with some suggestions how to communicate

risk to consumers of financial products. This was a more qualitative study, in which we

tried to select which dimension of risk is most valuable.

       The questionnaire is presented in Appendix C and there are three main sections.

In the first part, similarly to the study by Olsen (1997), we asked the respondents to list

those things that first come into their mind when they think about the risk related to the

investment of your stakeholder pension plan. That is, what factors come to mind when

they think of what might cause your income in retirement to vary. They had to list the

factors and then rank them in the order of importance.

       In the second part, we asked people to rate on a scale from 1 to 7, different ways

risk information is presented according to three criteria: (a) prefer to see risk

information, (b) feel most comfortable with, and (c) is most clear. Question 1 presented

risk purely in relational terms (as is the current practice) on a scale from 1 to 5 (1 is

least risky and 5 is most risky), while Questions 2–11 presented risk as variants on the

stochastic forecast theme – as probability for minimum, average, and maximum

possible return, potential for below-target returns, etc.

       In the third part, following Slovic (1987), we tried to obtain some more detailed

quantification also of the “unknown” (i.e., with the perceived level of knowledge about
an investment) rather than “dread” aspect of people's perception of the risk of financial

products. There were 21 questions (questions 12 to 33 as presented in Appendix C),

which are related to different factors that could affect people’s perception of the risk of

financial products and their retirement investment decisions. For each of them, the

respondents were asked to think about the extent to which their decisions might be

affected and circle the appropriate number on the scale from 1 (not at all affected) to 7

(very much affected). The “unknown” was described in the various questions as

unfamiliarity with the products (e.g., UK vs. foreign stock); lack of trust in the products

(e.g., people might not believe in equities because they are unpredictable in general),

the product provider (bank or investment fund), the particular company, or the financial

adviser; lack of knowledge about (trust in) the particular industry (e.g., energy,

telecom); lack of confidence in the economy and/or markets (systematic risk); and also

feeling of control over the course of the investment (e.g., ability to control loss or to

change the investment strategy). In summary, our goal here was to assess on which

dimensions do people fear taking out various financial products, and our conjecture was

that perhaps a lot is to do with the degree to which they are unknown to them. Thus we

could also investigate the relative importance of this risk aspect, in relation to the

“dread” elements - like chance of losing money.

Results

       There were 52 participants – 22 males with average age around 35, and 21

females with average age around 40, while 9 did not identify their gender and age. All

respondents were paid £5 for their participation.

       Table 4 presents the results from the first part of the questionnaire, which is a

summarised listing of the factors indicated as most important (ranked first) by 41
respondents (the other 12 did not answer this question). Olsen (1997) used similar

methodology.

Table 4. Suggested Characteristics of Investment Risk
Characteristic Category                                       Percentage of Time
                                                                Mentioned First
Stock market volatility                                              34%
Economic uncertainty                                                 22%
Saved amount (exposure)                                              12%
Salary/job uncertainty                                                7%
Characteristics of the investment company                             7%
Note: The median number of attributes mentioned per respondent was three.

       As can be seen, responses related to the stock market volatility dominate in

importance. The first two categories accounted for 56 percent of all top rankings and

usually included some reference to a market or economic condition that could cause a

loss in terms of the value of the investment. Appendix D presents a list of the top

ranked factors grouped according to the categories presented in Table 4. The factors

that are mentioned only once were not included in the table.

       Table 5 presents the average results for each question included in the second

part of the questionnaire according the three dimensions for evaluation.

Table 5. Results for each question included in the second part of the questionnaire
 Question       Useful       Understandable         Suitable          Average
     1            3.9               5.2               4.0               4.4
     2            4.1               4.7               3.5               4.1
     3            4.1               4.7               3.7               4.2
     4            4.9               5.0               4.3               4.7
     5            4.3               4.8               3.5               4.2
     6            4.1               5.1               3.1               4.1
     7            4.3               5.5               3.6               4.5
     8            3.9               4.1               4.0               4.0
     9            4.5               4.9               3.5               4.3
    10            4.4               5.0               3.5               4.3
    11            4.6               4.9               3.9               4.5


       The results are quite similar for all questions and along the three criteria – the

maximum difference is hardly above one point on each scale. However, we can still

draw some conclusions from these results. Thus, question 4 received highest ranking on
average. The risk there was presented as variation between certain minimum and

maximum values with some average in between, which is a good balance between

parsimony, informativeness, and clarity in comparison to other contenders like

questions 1, 7, and 11 (see Appendix C for their formulation).

        Table 6 presents the results from the third part of the questionnaire, which asked

the respondents to evaluate the twenty one factors (presented as question 12 to 33)

related to financial risk.

Table 6. Average ratings for the factors included in the third part of the questionnaire
   Question        Result
       12            5.6
       13            4.3
       14            5.0
       15            4.6
       16            4.6
       17            4.7
       18            4.9
       19            3.8
       20            4.0
       21            5.1
       22            5.2
       23            5.3
       24            4.6
       25            4.2
       26            4.4
       27            5.4
       28            5.3
       29            4.9
       30            4.0
       31            4.1
       32            4.4
       33            5.1


        The highest score was for question 12, which is related to the possibility for

very large loss in relation to the amount of money invested (for example, due to large

drop in share prices). Slovic (1987) also identified the potential for large or catastrophic

losses as a very important qualitative factor contributing to perception of risk.
       Otherwise, there was not a substantial difference between the evaluations of the

various factors – the average responses vary between 3.8 and 5.6. These results indicate

that all factors that were included in the questionnaire were perceived as important

determinants of risky financial decision making. However, in future research, we can

still group the most important factors (e.g., the ones rated above 5) and focus more

specifically on their effects (e.g., during real financial advice sessions or another

experimental study).
                                      References

Benartzi, S. & Thaler, R. (2002). How Much Is Investor Autonomy Worth? Journal of

     Finance, August, vol. 57, no. 4, pp. 1593-1616.

Gooding, A.E. (1975). Quantification of Investors' Perceptions of Common Stocks:

     Risk and Return Dimensions, Journal of Finance, 30, 1975, pp. 1,301-1,316.

MacGregor, D., G. & Slovic, P. (1999). Perception of Financial Risk: A Survey Study

     of Advisors and Planners. Journal of Financial Planning, Vol. 12, Issue 8, pp. 68-

     79.

MacGregor, D., G., Slovic, P., Dreman, D. & Berry, M. (in press). Imagery, Affect, and

     Financial Judgment, Journal of Psychology and Financial Markets.

Olsen, R.A. (1997). Investment Risk: The Experts' Perspective. Financial Analysts

     Journal, March/April 1997, pp. 62-66.

Slovic, P. (1972). Psychological Study of Human Judgment: Implications for

     Investment Decision Making, Journal of Finance, 27, pp. 779-799.

Slovic, P. (1987). Perception of Risk, Science, 236, 1987, pp. 280-285.

Slovic, P., Fischhoff, B., & Lichtenstein, S. (1985) Characterizing Perceived Risk, In:

     R. W. Kates, C. Hohenemser & J. X. Kasperson (Eds.), Perilous Progress:

     Technology as Hazard, pp. 91-123, Boulder, Colo.: Westview.

Stewart, N., Chater, N., Stott, H. P., & Reimers, S. (2003). Prospect relativity: How

     choice options influence decision under risk. Journal of Experimental Psychology:

     General, 132, 23-46.
                                                 Appendix A

                                 Financial Affordability Questionnaire


The following questions ask you about various facts and preferences related to your personal finances.
We also expect you to provide absolute numbers on your income and expenditure (in pounds). The
purpose of this test is to investigate to what extend your real financial circumstances at the moment affect
your choices in the saving and investment experiment that follows. It is essential to be as accurate and
honest as possible. We greatly appreciate your cooperation and we guarantee that the information that
you provide will remain strictly confidential.
      Please answer the following questions:
1)    What is your annual income: ______
2)    Which of the following statements reflect your financial circumstances (circle the appropriate one
      and provide the appropriate figures):
      a)     You spend less than you earn; state by how much: ______
      b)     You spend exactly the amount that you earn: ______
      c)     You spend more than you earn (for example by borrowing or living on credit); state by how
             much: ______
      In order to answer this question try to estimate to what extent your current annual income is
      sufficient to cover your necessities, and in particular try to figure out by how much your income is
      sufficient or insufficient to cover your annual expenses (for example, you could say that you spent
      around £2000 more than your current salary in order to cover your necessities).
3)    Try to estimate how much you are able to save at the moment. Please write down here your
      average annual savings: ______
4)    Here we provide you with a list of various types of spending and you have to answer how much of
      your current annual income is spent on each of these expenditures. There are two types of
      expenditure examples – essential (e.g., food and rent) and discretionary (e.g., leisure activities),
      and you have to give estimates of your annual spending across these categories (for example, you
      can say that you spend usually £200 on food, £250 on rent, and so on).
      a) Essential expenditure
      - Food _____
      - Rent / Mortgage _____
      - Utilities (electricity, gas, heat, light, water) _____
      - Car _____
      - Other transport (train busses) _____
      - Debt repayment _____
      - Communications (telephone, etc.) _____
      - Childcare and Schooling _____
      - Health _____
      - Repairs and Maintenance _____
      - Other (e.g., health and life insurance, etc.) _____
      b) Discretionary expenditure
      - Holiday _____
      - Entertainment (e.g., cinema) _____
      - Sport _____
      - Hobbies _____
      - Meals and Drinks _____
      - Other _____
        TOTAL EXPENDITURE: _____
5)    What is the maximum amount that you would like to save per year: _____
Can you give up some of your discretionary spending in order to increase your current savings rate if it
is bellow your preferred maximum amount indicated in question 5?
      YES / NO (circle the appropriate)
      In order to answer this question you need to focus again on your discretionary spending and
      estimate the degree to which you can readily reallocate money towards a pension. Here we also
      aim to test how important and essential some these discretionary expenditures are for you (e.g.,
      some people might be unwilling to give up certain hobbies, sport activities, etc.). Note that in the
      following experiment we will ask you series of questions about your preferred savings; and if you
      answer values that are above your current savings (provided in question 3), then we will ask you
      to give up some of your essential or discretionary spending in order to provide the additional
      capital that is required to cover the difference between your real current savings rate and the
      savings rate that you have indicated in some of the test questions.
                                              Appendix B

              Description of each question in the Prospect Relativity Experiment in Study I .

The questions are grouped by the key variable that the participants were asked to select (e.g., savings,

investment risk, etc.).

 I. Savings. The were five questions asking people to choose between savings options formulated as
 percentage that is saved out of the hypothetical income of £25000 per year.
           1) Choose how much to save without information about other variables.
           2) Choose how much to save and see expected retirement income.
           3) Choose how much to save and trade it off with retiring at different age and see the
               expected retirement income.
           4) Choose how much to save and see the retirement income and its minimum and maximum
               variability happening because assume that 50% of the savings are invested in the stock
               market.
           5) Choose how much to save and take different levels of risk starting from low savings and
               investment risk and then increase both in parallel.
 II. Risk. Next are the five questions asking people to choose levels of risk formulated as percentage of
 saving invested in risky assets:
           6) Choose how much to invest without information about other variables.
           7) Choose how much to invest and see expected retirement income and its variability.
           8) Choose how much to invest and trade-off it with retiring at different age and see the
               expected retirement income and its variability.
           9) Choose how much to invest and tradeoff it with amount to be saved (increasing investment
               corresponding to decreasing savings) and see the retirement income and its variability.
           10) Choose between levels of variability of the retirement income. Variability reflects
               different investment strategies and is increasing with the income (higher variability
               corresponds to higher income).
           IV. Risk preferences
           11) Asked people to indicate how much risk they are prepared to take on a scale from 1 (not
               at all – only sure outcomes) to 5 (very much).
           12) Asked people to indicate how much they are concerned about your financial future on a
               scale from 1 (not at all) to 5 (very much).
           13) Asked whether the respondent is more or less willing to take risks than the average person
               and to indicate the answer on a scale from 1 (much less) to 5 (much more).
           14) Asked whether the respondent is more or less concerned about his/her financial future
               than the average person and to answer on a scale ranging from 1 (much less) to 5 (much
               more).
           15) Asked respondents about their willingness to gamble on lifetime income by choosing
               whether the take on a new job with variability of the expected salary.
                                             Appendix C

                                  Perception of Financial Risk Survey

We are researching people's understanding of financial risk associated with investments related to
retirement pension provision in Britain. The results from our study will provide us with some suggestions
on how to communicate investment risk to consumers of financial products especially with relation to
their stakeholder pension plans. The questionnaire is organised in three parts, which will take you around
30 min. to complete. In the first part, we ask you to describe your understanding of financial risk; in the
second part, we would like you to evaluate different ways of presenting information about financial risk;
and in the third part you have to estimate to what extent your perception of financial risk is affected by
various factors.

Part I. How do you understand financial risk?

Imagine that you are considering whether to save for your retirement using a stakeholder pension which
provides a number of different investment options and you have to select the one which is most suitable
for you. The company managing your stakeholder pension plan will offer a range of different funds.
Each fund will hold one or more types of investment, which may include deposits, government bonds,
stocks and shares. You need to choose the funds in which your pension plan will be invested, but the
insurance company’s fund manager will select the individual investments to be held by that fund. For
example, you may choose a fund investing in the shares of UK companies, but the fund manager will
decide which companies are to be included. Your income in retirement depends on how well these
investments perform. Each type of investment is expected to give a different return. When you invest you
do not know how each investment will perform, but there are ways in which the expected outcome of
different types of investment can be measured. One simple measure is the level of risk associated with
each type of investment. The return on higher risk investments is more uncertain – you may do very
well or very badly compared to lower risk alternatives and you are likely to see greater fluctuation in the
value of your investments over time. On average, however, you should expect high risk investments to
provide a higher return over the long term. Lower risk investments will tend to provide lower, more
stable returns. You have to consider whether you are prepared to accept a higher degree of risk for your
savings or to take a more cautious approach.

In the space below, list those things that first come into your mind when you think about the risk related
to the investment of your stakeholder pension plan. That is, what factors come to mind when you think of
what might cause your income in retirement to vary. List the factors in the first column and then in the
second column rank the in the order of importance. For example if you list five factors, then 1 should be
the most important and 5 the least important. Feel free to write as much or as little as you wish (but not
anything at all!).

                                        Factor                                             Importance




more:
Part II. Presentation of financial risk information

Imagine that you are 30 years old and you are going to retire at 65. Here you are offered the opportunity
to invest your savings in a fund that will eventually provide you with a retirement pension. This
investment fund is characterized as moderately risky because it invests 30% of your savings in Low Risk
Assets while the other 70% of your savings are invested in a High Risk Assets offering a higher expected
return but with greater uncertainty in the range of outcomes. Note that these figures take into account the
possible future inflation. Assume also that your annual salary is £20,000 and you save £2,000 every year
until you retire (this is allowing for a contribution from your employer and tax relief on the amount you
pay) Let’s presume also that your planned retirement income is £10,000 in today's money (in other words
your target will be increased each year to cover expected inflation) before tax. Here there are twelve
ways (point 1 to 12 below) in which risk information about this particular fund and your investment
could be expressed and we ask you to read them through carefully and at the end we ask you to rate on a
scale from 1 to 7, different ways risk information is presented according to three criteria:

     How risk information is most useful for you to make financial decisions related to your retirement
      pension provision (which means how useful is this risk related information for you in helping you
      think about your financial future).
     How risk information is most understandable (which means whether you could straightforwardly
      interpret what the information is telling you about your finances).
     How suitable for you is the proposed fund after risk information is described in these terms.

Here there are 11 ways of describing your retirement investment:

1. Your investment can be rated on a scale from 1 to 5 indicating on overall, how risky is the
investments. For example, 1 is least risky and 5 is most risky investment. These ratings of the risky
investments (or funds) can also be described in the following way:

      1. Very Cautious – provides steady return with minimal fluctuations.
      2. Cautious – provides steady returns however they will experience some degree of price
      fluctuations.
      3. Balanced – offers good growth potential, but is subject to average levels of price fluctuations.
      4. Adventurous – returns may be expected to be higher over longer terms but will be subject to
      greater fluctuations.
      5. Speculative – offers excellent growth potential over the long term but may be subject to very
      significant (wider) return fluctuations in the shorter term.

According to this scale your investment fund (described at the beginning) can be rated as number 3 or as
“Balanced” investment. Note that this information just says that one investment than riskier than another
and higher risk is expected to produce higher returns but with bigger variability of these returns. This risk
rating does not provide a numerical forecasting of expected future return.

2. The precise amount of your pension is unpredictable, because of possible variation in investment
performance, but it is very likely (more than 95% chance, i.e. the 5 th percentile) that your retirement
income cannot get below certain minimum, which for your fund is £4,153 (so here we show you the
minimum possible return).

3. The precise amount of your pension is unpredictable, but if you invest in this fund, then on average
(50% chance) you can get more than £9,825 annual retirement income (i.e., what is the median expected
pension).

4. The precise amount of your pension is unpredictable, because of possible variation in investment
performance, but it is very likely (more than 95% chance) that it will be between certain minimum and
maximum values with some average in between. For instance, if you invest in this fund, then it is very
likely (95 percent chance) that your annual retirement income will be more than £4,153 and less than
£23,248, and on average (50 percent chance) you can get more than £9,825 (thus here we show you
minimum, average, and maximum possible returns).
5. When you invest in the fund there is 10% chance getting less than you put in (save). Here we show
you the chance of a loss of the accumulated investment so that you get less money back from your
pension fund than the amount you paid in.

6. There is 50% chance that you might not get the desired £10,000 annual pension (thus your investment
will earn a return below what you expect your target).

7. There is a 90% chance that you will get back at least the amount of money you put in the fund.

8. If you invest in the fund, then there is relatively high potential (above 87% chance) that you will gain
10% return (interest rate) on your invested savings. Here we present the probability of gain – how likely
is it that you will gain certain return on your savings for retirement.

9. If you invest in this fund, there is less than 10% chance that your invested savings will not cover your
basic needs after retirement so that you will not be able to provide yourself (with food, health, and
shelter, which estimated to cost at least £5,000 per year) after retirement.

10. There is a 48% chance that you will be able to receive £10,000 annual pension – this is the
probability that you can get your target retirement income.

11. The graph bellow presents the probability distribution of the possible annual retirement incomes that
you can get from your investment in the fund. In particular, each bar on the graph represents a retirement
income and how likely is to achieve that income in comparison with the other possible incomes after you
retire. In other words, higher the bars are, more likely is to get that income relative to the other incomes.

   0
   0
   0
   0
   0
   0
   0
   0
   0
   0
   0
               2,000
                       4,000
                               6,000
                                       8,000
                                               10,000
                                                        12,000
                                                                 14,000
                                                                          16,000
                                                                                   18,000
                                                                                            20,000
                                                                                                      22,000
                                                                                                               24,000
                                                                                                                        26,000
                                                                                                                                 28,000
                                                                                                                                          30,000
                                                                                                                                                   32,000
                                                                                                                                                            34,000
                                                                                                                                                                     36,000
                                                                                                                                                                              38,000
                                                                                                                                                                                       40,000
                                                                                                                                                                                                42,000
                                                                                                                                                                                                         44,000
                                                                                                                                                                                                                  46,000
                                                                                                                                                                                                                           48,000
                                                                                                                                                                                                                                    50,000
           -




                                                                                    Possible retirement incomes

After you have read statements 1 to 11 (which were for the same investment described at the beginning)
use the scales bellow (ranging from 1 to 7) to indicate (by circling one of the numbers on each scale)
how useful (from 1-not at all useful to 7-very useful) and how understandable (from 1-not at all
understandable to 7-perfectly understandable) is the risk information presented in each statement. In the
third column, rate how suitable for you is the proposed fund after risk information is described in these
terms (from 1-not at all suitable to 7-perfectly suitable).


 Statement                             How Useful                                                    How Understandable                                                 How suitable is the fund
       1                 1       2      3       4       5        6        7                    1         2       3        4       5       6        7                     1        2       3        4       5       6        7
       2                 1       2      3       4       5        6        7                    1         2       3        4       5       6        7                     1        2       3        4       5       6        7
       3                 1       2      3       4       5        6        7                    1         2       3        4       5       6        7                     1        2       3        4       5       6        7
       4                 1       2      3       4       5        6        7                    1         2       3        4       5       6        7                     1        2       3        4       5       6        7
       5                 1       2      3       4       5        6        7                    1         2       3        4       5       6        7                     1        2       3        4       5        6       7
     6           1   2   3   4   5   6   7       1   2   3   4   5   6   7      1   2   3   4   5   6   7
     7           1   2   3   4   5   6   7       1   2   3   4   5   6   7      1   2   3   4   5   6   7
     8           1   2   3   4   5   6   7       1   2   3   4   5   6   7      1   2   3   4   5   6   7
     9           1   2   3   4   5   6   7       1   2   3   4   5   6   7      1   2   3   4   5   6   7
    10           1   2   3   4   5   6   7       1   2   3   4   5   6   7      1   2   3   4   5   6   7
    11           1   2   3   4   5   6   7       1   2   3   4   5   6   7      1   2   3   4   5   6   7



Part III. Factors affecting your risk perceptions and financial decisions

The following twenty questions aim to understand to what extent your perception of the risk of financial
products affect your retirement investment decisions As in part II, assume you are 30 years old and you
are going to retire at 65. You have decided to save £2000 every year until you retire and are thinking
about what investments you could make. Listed below are a number of different factors that could affect
the decisions you make. For each of them, please think about the extent to which your decisions might be
affected and circle the appropriate number on the scale from 1 (not at all affected) to 7 (very much
affected).

12. Possibility for very large loss in relation to the amount of money invested (for example, due to large
drop in share prices).
    Not at all                                                                            Very much
    affected                                                                               affected
        1                2              3             4           5            6               7

13. Unfamiliarity with a type of investment (for example the foreign stock rather than UK stock, or
company stocks rather than government bonds).
   Not at all                                                                        Very much
    affected                                                                          affected
        1              2            3            4           5            6               7

14. Lack of knowledge about particular investments (for example the investments held and performance
of each fund)
    Not at all                                                                        Very much
    affected                                                                           affected
        1             2             3           4            5             6               7

15. The unsuitability of particular types of investments (for example some people might not want to
invest in shares in principal because they are uncertain)
    Not at all                                                                      Very much
    affected                                                                          affected
        1                 2            3             4         5          6               7

16. Lack of trust in the particular industry (for example people might believe that telecom or high tech
industry is unstable and can crash any time).
    Not at all                                                                            Very much
    affected                                                                               affected
        1                2             3            4           5            6                 7

17. Lack of trust in the particular company in which you are investing, which might depend on its
competitive position, industry type – for example, Microsoft or Enron might be seen as unreliable
companies because they have been accused of illegal business conduct.
   Not at all                                                                     Very much
    affected                                                                        affected
        1               2            3           4             5         6              7
18. Lack of confidence in the future performance of the economy and/or the stock market. This relates to
uncertainty about the growth prospects for the economy or other factors influencing the performance of
the stock market, which will affect what your investment is worth.
    Not at all                                                                          Very much
    Affected                                                                             affected
        1               2             3            4            5            6               7

19. Lack of confidence in the workings of the financial markets (for example arising from concerns over
accounting standards)
    Not at all                                                                          Very much
    affected                                                                              affected
        1              2            3             4             5            6                7

20. General uncertainty about investment products in general (for example you might feel more
comfortable saving in simple products such as deposits or investing in property).
   Not at all                                                                     Very much
    affected                                                                       Affected
        1               2           3             4              5            6       7

21. Lack of trust in the product provider (the financial services company which sells you the stakeholder
pension plan).
    Not at all                                                                           Very much
    Affected                                                                               Affected
       1                 2            3             4              5          6                7

22. Lack of trust in the financial adviser who advises you about your savings and investments. (e.g. some
people might think that financial advisers may try to sell you products which are not necessarily in your
best interests).
    Not at all                                                                           Very much
    affected                                                                              affected
        1                 2            3            4            5             6              7

23. Feeling of loss of control over the course of the investment (for example, would you know when and
be able to change your investments to respond to events affecting financial markets)
    Not at all                                                                           Very much
    affected                                                                              affected
        1                2             3             4            5            6              7

24. The worry and anxiety that may be caused if the value of your investment decreases (for example,
you can now see daily fluctuations in the value of your investment)
    Not at all                                                                       Very much
    affected                                                                          affected
        1               2             3             4           5         6               7

25. The fact that investing for a pension is complex process and something you are not used to doing.
    Not at all                                                                           Very much
    affected                                                                               affected
        1                2             3            4             5          6                 7

26. Concern as to whether you will lose state benefits to which you would otherwise be entitled if you
did not save for your retirement.
    Not at all                                                                           Very much
    affected                                                                               affected
        1                2           3             4             5            6                7

27. The possibility that, event if your investment increases in value, it may still not be enough to provide
a proper style of living after retirement in case of investment loss.
    Not at all                                                                                Very much
    affected                                                                                   affected
        1                 2             3              4            5             6                7
28.The possibility that your investment does not increase in value so that you do not reach your target
retirement income.
    Not at all                                                                          Very much
     Affected                                                                            affected
        1               2            3            4            5             6               7

29. The fear that you might be making a wrong decision (for example, the investment might not perform
well and you would have been better off choosing another investment or not saving at all).
    Not at all                                                                           Very much
    affected                                                                               affected
        1               2           3             4            5             6                 7

30. The fear that you may not be able to meet the saving commitment of £2000 a year in future years or
that you will not be able to access your savings until retirement.
    Not at all                                                                        Very much
     affected                                                                           affected
         1               2             3             4             5      6                 7

31. The liquidity of your investment – how easily you could get your cash, which is affected by the
ability to sell quickly, the degree of investor interest, capital markets trade volume, and so on.
    Not at all                                                                                Very much
     affected                                                                                   affected
         1                 2             3             4             5             6                7

32. Equity or fairness of the risk-benefit distributions. Where there is a risk involved it is much more
acceptable if the risk is confined to individuals who have a potential for personal gain from taking the
risk. Are you (and your dependants) taking the risk that everybody else takes in order to obtain the
expected benefits or others might get away with lesser risk?
    Not at all                                                                            Very much
     affected                                                                               affected
         1               2             3            4            5             6                7

33. Likelihood that cost of life (prices) will go extremely high due to high inflation, which will make you
savings unable to cover your life needs (in other words, the prices might increase so much so your
pension would not be enough to provide you).
    Not at all                                                                              Very much
    affected                                                                                  affected
        1                2              3             4            5             6                7
                                            Appendix D

                            Risk factors ranked first by the respondents

Respondent     Written description of the factor

Stock market volatility (34%), i.e., related to possibility for large loss
     1        Stock market volatility
     2        Market performance – recent IT revolution has made the stock markets much more
              volatile
     3        Security of investment
     4        Stock market performance
     5        Long term evolution of the financial markets and the stock exchange
     6        Large, global stock market slumps
     7        Fluctuations in the market
     8        Stockmarket fluctuations
     9        Market performance
    10        Safety of investment (stock volatility?)
    11        Fall in stock market
    12        Stock market crash
    13        Previous company performance
    14        ISAs

Economic uncertainty (22%)
    15      Value of my home
    16      Economic environment
    17      Interest rates
    18      General cost of living
    19      World’s and specifically UK’s economy
    20      Interest rate fluctuations
    21      Recession
    22      UK economy
    23      Overall economic conditions – growth of economy

Saved amount (exposure) - 12%
    24       amount I invest each month
    25       Monthly investment cost
    26       What can I afford to invest as % of income
    27       5 - How high you put in £££ (exposure?); 3 – the risk of what you are investing in
             (volatility of the stock/company?)
    28       Maintain up standard of living – meet bills

Characteristics of the investment company – 7%
    29         Practices of investment company
    30         Capability of the fund manager
    31         Type of fund

Salary/job uncertainty (7%)
     32       Loosing my job
     33       Redundancy
     34       Working period / Retirement age

    35        Guarantees of income to live on

    36        To risk about pension is very dangerous for my future

    37        Not really understanding the product, therefore no control over how much I need to
              invest
38   I would want to be more involved and in control of high rise investments

39   Death of partner

40   Me and my family’s health (if in serious health problems, would wish to sell my stock)

41   War

				
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Description: Testing the validity of the prospect relativity principle in real