No risk, no fun?

September 19, 2005

Tall people are more prepared to take risks than small people, women are more careful than men, and the willingness to take risks markedly decreases with age: these are the findings arrived at by researchers from the Institute for the Study of Labor (IZA), the University of Bonn and the German Institute for Economic Research (DIW) in Berlin. For their study they evaluated more than 20,000 interviews with people from all over Germany and additionally confirmed the findings by experiment. What is particularly striking is that people who enjoy taking risks are more content with their lives.

The interviewees were supposed to imagine that they had won 100,000 euros in a lottery, part of which they could invest in a bank. There was a 50% likelihood that they would thus double the amount invested within two years. However, the risk of losing half the money invested was just as great.

'Under these conditions, women invest about 6,000 euros less than men,' Professor Armin Frank, who researches and teaches at Institute for the Study of Labor and at the University of Bonn, explains. 'Irrespective of gender, younger people invest a larger sum than older ones - the annual difference is approximately €350.' Willingness to take risks also depends on body height: for every centimetre the amount invested rises by €200. Furthermore, educated parents have children who are more prepared to take risks.

For the study, more than 20,000 interviews were evaluated by Professor Falk and his colleagues Dr. Thomas Dohmen, David Huffman and Dr. Uwe Sunde, together with the DIW researchers Dr. Jürgen Schupp and Professor Gert Wagner. In it the interviewees were asked to assess their willingness to take risks on a scale from zero (= not willing to take any risks) to ten (= very willing to take risks) and also to take part in the intellectual experiment described above. The results: Smokers are more willing to take risks than non-smokers. The same is true for people who prefer to invest their wealth in shares rather than in fixed-interest investments. And: People who enjoy taking risks are more content with their lives.

Bird in the hand or two in the bush?

Yet the way that interviewees assess themselves and their actual behaviour are often worlds apart. In order to estimate how reliable the interview data were, the researchers invited 450 randomly selected test persons from all over the country to play a simple game of chance. This time real money was at stake: to be precise, €300. This was the amount which the participants could win in a lottery - however, the risk that they would leave empty-handed was just as great. Alternatively they could accept a fixed sum instead of taking part in the lottery - €10, €50, €150 or €200. The test persons were then required to say from what fixed sum onwards they would prefer to bet on the potential €300 (the 'birds in the bush') rather than taking the fixed sum (the 'bird in the hand'). The sooner the participants decided in favour of the bird in the hand, the lower their willingness to take risks was.

'The experimental findings tally very well with the interview data,' Professor Falk emphasises. 'Those who claim in the interview to be willing to take risks also show a high degree of willingness to take risks in the experiment, where a relatively large sum of money is at stake.' Various statistics also seem to confirm the results: thus the number of traffic offences almost parallels the readiness to take risks in the age group concerned - in other words, the younger the driver, the more carelessly they drive.

Public services attract people averse to risk

However, the authors of the study are wary of interpreting their findings. It is precisely the link between a willingness to take risks and being satisfied which is difficult to interpret. 'It's a classic chicken and the egg problem,' Professor Falk comments. 'Are people who are satisfied more optimistic because they are satisfied and thus more ready to take risks? Or is someone who is not afraid of risks a person who takes their life into their own hands and shapes it the way they want to?'

Incidentally, the willingness to take risks also seems to influence the choice of occupation. The Bonn results show that self-employed people are less cautious, whereas people working in the public services are more concerned about security.
-end-
The original article is available on the Internet at ftp://ftp.iza.org/dps/dp1730.pdf

University of Bonn

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