Risk attitude, investments, and the taste for luxury

Nudging people to make good investments is necessary because of low financial literacy. One type of advice concerns allocation to risky vs. safe investments. Financial advisors generally assume that people differ in their risk attitudes, and they sometimes try to assess these attitudes with questionnaires about risks. But attitudes toward risks are influenced by many factors that are irrelevant to ultimate outcomes. Arguably, what is important is the utility of money. Some people are satisfied with a no-frills retirement, while others hanker after travel, yachts, and large legacies. It is the latter group who would do well to take risks, as their utility for money is less concave, more linear. I report a questionnaire study in which questions about risk itself were uncorrelated with questions about the utility of money and the taste for luxuries, which were correlated in reasonable ways with each other. ∗The work was supported by a grant from the U.S.-Israel Bi-national Science Foundation to J. Baron and I. Ritov. Address: Department of Psychology, University of Pennsylvania, 3720 Walnut St., Philadelphia, PA 19104–6241. Email: [email protected].