Dimensionality of Risk Perception

Factors Affecting Consumer Understanding and Evaluation of Financial Risk

Given the understanding that financial decisions made by consumers tend to be suboptimal. This is caused because of their understanding of risk and attitudes towards risk.   We took up a Exploratory, cross-sectional study using structured method and face to face personal interview of 104 respondents, to understand more about these underlying factors of risk, particularly about the retirement fund. We find out that 4 major factors influence the decision of the consumers, as below.

•    Fear of Future
•    Fear of Unknown
•   Uncertainty  and
•   Trust on market

Further the data underwent hierarchical cluster analysis followed by K-Means clustering procedure, which divided the respondents into three segments, based on the characteristics.

•  Believers :  who are believers in the market phenomena but with concerns on lack of control and complexity of financial decision making. Improvement in trustworthiness, transparency in investment decisions and simplified communication may help target this segment. In addition, flexibility in the management of portfolio vide customization may help alleviate the concerns of lack of perceived control.
• Rationales:  who does believe in everything except their own commitments.  They are concerned about meeting their savings commitment and predominantly influenced by rationality of the markets.  They understand the functioning of markets. Targeting this segment would require addressing fear of general uncertainty and therefore savings commitment. Also, ease of plans with regards to meeting commitments may help. 
•  Avoiders:  who trust themselves but none-other. They are not confident on their finance related decisions, liquidity of investment and/or future value of savings caused by inflation. In all, they are more likely to not make investments on market related retirement funds.  They are more likely to avoid investments in market related retirement funds.

Managerially, the study provides directions to companies offering retirement funds about the important decision making dimensions of consumers, This study also segments the markets based on the underlying dimensions to help in segmenting markets,  understanding needs specific to segments and therefore allow for decision making of product design, pricing and promotional or positioning plan of the offer.

The study is however limited to the context of retirement funds and geographical location of respondents.