CHAPTER 3: RISK PERCEPTION
3.4 THE LINK BETWEEN RISK PERCEPTION, RISK TOLERANCE AND FACTORS INFLUENCING RISK
3.4.1 The influence of demographics on risk tolerance and risk perception
Demographics refers to the description of people (United Nations, 2014). Similarly, Chakreeyarat (2015) defines it as the process of acquiring data about people who meet specific criteria at a certain point. According to Brunson et al. (2015), demographics assists in grouping a population according to characteristics such as age, gender, and ethnicity. These demographics significantly influence individuals' risk perceptions as several studies have found that younger people (between 18 and 34) tend to be more tolerant towards risk than older people (35 and above), who are less tolerant towards risk. The section below will discuss how demographics influence risk perceptions.
Sung and Hanna (1996) conducted early research about the effect of demographic and socioeconomic factors on several financial factors in the financial services context.
Demographic factors include, amongst others, age, gender, and ethnicity (Plous, 1993 &
Bazerman, 1998). On the other hand, socioeconomic factors include marital status, level of education, employment status, and income, amongst several others (Slovic et al., 1980).
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Similarly, Bajeux-Besnainou (2003) used the following demographic and socioeconomic factors from 1992 data for Survey of Consumer Finance (SCF): age, years left until retirement, education level, ethnicity, marital status, household size, and homeownership.
The results concluded that younger people who had more than 29 years to retirement were mostly highly educated and non-white (Bajeux-Besnainou, 2003). Also, they were self- employed and had more tolerance towards high levels of risk. However, Sung and Hanna (1996) were unsuccessful in determining the same link with age, household size, occupation and homeownership. Wang and Hanna (1997) conducted a similar study examining demographics and socioeconomic factors and found a significant positive relationship between age, income, education, and marital status on the levels of risk tolerance. According to Han (2005), the same results hold for insurance policyholders as younger policyholders are more accepting of risk than those who are older.
Extending prior research, Grable and Lyton (1998) found that gender, marital status, occupation, self-employment, race, and education differed with individuals’ levels of risk.
Among the factors mentioned above, individuals with higher levels of education are willing to take more risks than individuals with lower levels of education (Padua et al., 2013). This is because those with higher levels of education have more financial knowledge, stable and predictable income; therefore, they are more knowledgeable about the losses they face when taking risks (Brown &Taylor, 2007). Regarding gender, men tend to have less dread and worry about risk compared to women. This is because, in general, women tend to have more pro- safety attitudes than men, making them highly concerned about risks.
Pilisuk and Acredolo (1988) also conducted a similar study on demographics and found that high-income earners are less concerned about hazards than lower-income earners. The results highlight that higher income earners often have a better understanding of risks and hazards and therefore become more accepting of them. In this case, the insurance policyholders who are considered high-income earners are less concerned about risks relating to possessions they have insured because they can be easily replaced. On the other hand, lower-income earners are less tolerant to risks making them more concerned because their insured possessions will be hard to replace if the insurance cover does not provide full coverage for an item or property (Savage, 1993).
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The unknown factor regression lacked explanatory power, and it was difficult to conclude from the results. However, Kadoya et al. (2018) stated that as people get older, they become more informed about risk and tend to be less worried about risks. This is the same for insurance policyholders who often lack full knowledge about their insurance policies. Lastly, the personal exposure factor revealed that blacks feel more threatened and thus are more fearful of hazards than non-blacks. Moreover, older people feel more exposed to risks that cause health threats and thus stay informed about new diseases that may threaten their health. OECD (2007) reported that insurance policyholders with health conditions often feel more exposed to risks and resort to life insurance if they are still young, with children.
As stated, the willingness of an insurance policyholder to take on a certain level of risk is called risk tolerance. In addition, several demographic and socioeconomic factors can influence an insurance policyholder, as shown in Table 3.2.
Table 3. 2: Demographic and socioeconomic characteristics influencing risk tolerance
Characteristics High tolerance
Age Young individuals
Employment status Full-time employee
Ethnicity White
Gender Male
Health status Good or excellent
Income High level of income
Income variability Stable and predictable
Level of education Bachelor’s degree or higher
Level of income High level of income
Level of financial knowledge Average or higher
Marital status Single
Net worth High net worth
Religion Non-religious
Homeownership Homeownership without mortgage
Source: Irwin (1993)
Savage (1993) aimed at analysing demographic influences on risk perceptions by looking at three factors: dread, the unknown risk, and personal exposure to the risk. The study by Savage (1993) considered how individuals view common hazards (home fires, accidents and health
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issues) using the three factors mentioned above. According to Slovic et al. (2000), people tend to have higher dread for events the individual cannot, by personal skill or diligence, avoid harm.
Also, the unknown factor comprises the fact that an individual may not know the risk or may not be aware of the hazard as it occurs. Lastly, the personal exposure factor represents the relevance of a hazard to the life of an individual.
Savage (1993) found that for the dread factor, the adjusted R-squared was 0.19, indicating that approximately 19 percent of the results was explained by the regression. However, strong results for individual demographic factors were shown. Blacks tend to be more fearful of hazards than other races. The results show that people with lower levels of schooling and higher incomes are less fearful of hazards. This is because high-income earners can easily replace insured possessions, which can threaten certain risks (Discovery, 2009). Savage (1993) further stated that women have more worry and dread for risks while older people are significantly less fearful of risks. This is because older people have had a long time to plan their lives in case a hazard strikes.