Behavioral Economics and Risks

Behavioral Economics and Finance
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Behavioral Economics and Finance
Introduction
Risk –aversion is described as the extent of the feeling a person has or experience when making a decision of something or engaging in an activity with indefinite results, for example, a decision about money, happiness, status, and any other thing of importance (Dohmen et al., 2018). Risk-seeking behaviors involve a person making a preference for gambling with a lower or equal anticipated value over another activity with a particular outcome (Hertwig et al., 2019). Psychologists and economists engage either a behavioral approach or self- report approach in measuring the risk preference.
A) How the definition of risk preference used in economics differs from the one used in psychology.
In economics, risk preference refers to a behavioral measure of the tendency of choosing to engage in an activity that involves a higher difference in possible financial outcome over another option that have a lower difference of outcome but with the same envisaged value. That does not rely on whether the final result will implicate losses or gains (Hertwig et al., 2019). On the other hand, Psychologists interpret risk preference as the tendency to take part in activities or behaviors, even though they are pleasing and gratifying them may lead to possible loss or harm to themselves or others (Arslan et al., 2020). Their interpretation is based on self-report.
 B). A more accurate definition of risk preference between psychology and economic definition.
The psychologists' definition of risk preference is more accurate than the economic definition. That is because when the risk preference is measured in terms of the self- report, it gives domain-specific, general, and precise constituents and a high degree of convergent validity. It explains how individual behaviors and attitudes relate to making them engage in daring and adventurous activities that involve risk-taking, for instance, irresponsible online behaviors and drug abuse that may harm the person physically or psychologically (Hertwig et al., 2019). The economic definition is inclined to behavioral measures that do not measure the trait-like features of risk preference. Additionally, it gives different opinions and diverse perspectives on an individual’s risk appetite.
C). Description of the two different approaches to measuring risk preferences.
The behavioral approach-This approach explains how peoples' values, utilities, benefits, and genuine opinions are revealed through their choices. It relies primarily on monetary gambles such as the lottery. Economists and finances often use this approach.
Self- reported approach- This approach count on the...