Models of risk and choice: challenge or danger

What is it about?

A dimensional model of perceived risk and a model of risk acceptance based on risk rates are proposed in this paper. In line with the proposed model of perceived risk, risk is a linear combination of the three basic dimensions of a risky situation: the amount and probability of loss and the amount of gain. It is assumed that psychological transformations are made on these dimensions. According to the model of acceptance, acceptance is judged by making a trade-o€ between perceived risk and the amount of gain. These models have been investigated in two experiments, in which risk judgments and acceptance rates for a set of descriptions of risky investments were collected from managers in Poland. The proposed dimensional model of perceived risk was compared to the distributional models of risk and to the risk models based on the expectation principle. The best ®t was obtained for the proposed model. It was also found that perceived risk was useful in predicting acceptance rates. Better ®ts were obtained for the models of acceptance, based on perceived risk, than for the expected/weighted utility models, including bilinear models.

Featured Image