A Satisficing Approach to Measure Risk Preference

We explore a satisficing approach (Simon, 1955) to measure risk preference, which suggests cognitive limitations to decision making. In an experiment, subjects invest in a portfolio that contains a risk-free bond and a risky asset which has high or low return states with equal probability. The experiment elicits aspirations of subjects and predicts asset allocation in the bond and risky asset so that it meets their aspirations. A measure of risk is developed using the aspiration data since a more risk-averse subject shall conservatively set her aspiration in A1. Intuitively, satisficing by aspiration setting tones down the extreme possibilities and thus presents less risky prospects to subjects. The study also calibrates the degree of satisficing by mapping the satisficing approach to the expected utility approach. The degree of satisficing exhibits how the decision maker limits her possible loss by forgoing possible gains. The findings of the study are reflective that in certain situations, the utility from a satisficing decision is greater than maximising, therefore making it a valuable approach for market design