On the relationship between financial literacy and choice behaviours under different risk elicitation methods in surveys

Abstract

ABSTRACT A few pieces of literature based primarily on experiments have proved that the risk elicitation instrument can affect the measurement of subject’s risk preferences. Using the China Household Finance Survey data, we focus on the risk choice behaviours of respondents when they choose between two different elicitation methods that have different complexities and a different number of options, respectively. Specifically, one is simpler but with more options, and another is more complex but with fewer options. Moreover, we further discuss the impact of two methods on the relationship between financial literacy and risk attitude. The theoretical and empirical studies indicate that the respondents will be more risk-loving in the elicitation method with simpler and more options because of computation avoiding and noisy behaviours. Also, this paper finds that financial literacy has a positive relation with risk preferences, and low-literacy respondents have more irrational drift behaviours of risk choice. Our results suggest that it is vital to tradeoff the complexity and number of options for risk elicitation methods in surveys.