Decision making for self versus others : effects on risk premium.

• Main Authors: Ng, Kevin Jun Liang., Chua, Elise Jia Hui., Chan, Carissa Li Feng.
• Other Authors: Nanyang Business School
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Business
• Online Access: http://hdl.handle.net/10356/51396
• Institution: Nanyang Technological University

Skewness and variance are two key measures of risk that affect an individual's risk preference. Risk preference refers to the preference of an alternative under risky conditions and is a matter of individual inclinations. It can be measured by risk premium, the minimum compensation an individual requires before he is willing to forgo certainty and opt to gamble. Existing literature has established individual risk preferences when making decisions for self under varying levels of risk. However, whether these risk preferences still hold true when individuals make decisions for others is largely unknown. For our study, participants made choices among various risky and non-risky alternative options with known probabilities of returns for self as well as for others. Participants were then paid real money based on their decisions. We found a positive relationship between variance and risk premium, and who the choice was being made for had no significant effect on the results. Similarly, for zero and positive skewed gambles, participants demand almost similar risk premiums regardless of who they were deciding for. However, for negatively skewed gambles, participants became significantly more risk seeking when deciding for others, requiring a lower risk premium than if they were deciding for themselves. Our results revealed greater than expected similarities in risk preference when we decide for others and self, as well as subtle differences when deciding for others, particularly in the area of skewness. We anticipate our study to be a starting point for more in-depth research into the possible drivers behind these differences.