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Perceived Relative Wealth and Risk Taking
Report

Perceived Relative Wealth and Risk Taking

Dietmar Fehr and Yannick Reichlin
CESifo Group Munich, 2021
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Editorial Rating

7

Qualities

  • Analytical
  • Innovative
  • For Experts

Recommendation

Academics Dietmar Fehr and Yannick Reichlin explore the connection between people’s perception of their financial status and their willingness to take risks. Clearly, psychology plays a role, and different individuals will assess their odds in different ways, but the results of this research on relative economic standing could add to the toolkit leaders use to address income inequality. Scholars and financial professionals interested in how people’s beliefs about their social positions influence their economic behavior will find valuable insights in this authoritative report.

Summary

Your perception of your relative financial status influences your risk-taking decisions.

Individuals placing capital at risk, whether in US Treasury bonds, cryptocurrencies, equities or even lottery tickets, make a decision that is predicated on achieving both an “absolute gain” and a proportional return that is measured against those of peer investments. But people’s perceptions of their relative rank in society’s distribution of wealth also play a part in determining the amount of financial risk they will assume.

Each person’s understanding of his or her comparative standing is unique, and as such, risk tolerances differ. Interestingly, these perceptions arise from an individual...

About the Authors

Dietmar Fehr is a professor at Heidelberg University in Germany, and Yannick Reichlin is a researcher at the European University Institute in Italy.

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