Risk Analysis, Vol. 17, No. zyxwvutsrqp 4, 1997 zyxwvutsrqp Cross-Cultural Differences in Risk Perception: A Model- Based Approach Robert N. Bontempo,’ William P. Bottom,2 and Elke U. Weber3P Received June 3, 1996; revised January 9, 1997 zyxwvu The present study assessed cross-cultural differences in the perception of financial risks. Students at large universities in Hong Kong, Taiwan, the Netherlands, and the U.S., as well zy as a group of Taiwanese security analysts rated the riskiness of a set of monetary lotteries. Risk judgments differed with nationality, but not with occupation (studentsvs. security analysts) and were modeled by the Conjoint Expected Risk (CER) model?’) Consistent with cultural differences in country uncertainty avoidance,(2) CER model parameters of respondents from the two Western countries differed from those of respondents from the two countries with Chinese cultural roots: The risk judgments of respondents from Hong Kong and Taiwan were more sensitive to the magnitude of potential losses and less mitigated by the probability of positive outcomes. KEY WORDS: Risk perception; risk assessment; financial zyxwv risk; cross-cultural differences; uncertainty avoid- ance. 1. INTRODUCTION 1.1. Reasons for Investigating Cultural Differences in Risk Perception A widely known and important insight in the theory of negotiations is that differences between negotiating parties in the perception and/or valuation of some of the dimensions under negotiation open the door for integra- tive bargaining Given the rapid globalization that commerce and trade are currently undergoing, it is also incontrovertible that cross-cultural negotiations will become ever more common. In combination, these two observations suggests that researchers as well as practi- tioners ought to search for systematic and predictable differences in the perceptions and/or values held by members of different cultures because such differences Graduate School of Business, Columbia University. Depariment of Psychology and Max M. Fisher School of Business, The Ohio State University, Columbus, Ohio. To whom all correspondence should be addressed at 1885 Neil Av- enue, Columbus, Ohio 43210. *John M. Olin School of Business, Washington University. have potentially beneficial implications in the area of exchange. The current literature often emphasizes the negative consequences of cultural differences in percep- tion, noting, for example,(4) that “[cultural] differences [in the calibration of probability judgments] suggest that cross-cultural miscommunication about uncertainty is virtually guaranteed” zyxw @. 169). While differences in per- ception or value may indeed be a source of confusion and miscommunication, especially when negotiating par- ties are unaware of the possibility of such differences, they clearly also have constructive potential, especially if both parties are aware of the possibility and direction of such differences. Differences in the perception of the value and/or the risk of risky options between different parties have direct implications for their exchange. Markowitz’~(~) model of portfolio selection assumes that the decision maker will seek to minimize the risk of a portfolio for a given level of expected return. The early risk-return models of finance(5) equated risk with variance, a for- malization that is compatible with a quadratic utility function for money.@) Recent ~ork(~-~O) has shown, how- ever, that a broad range of utility functions have risk- return interpretations. Different utility functions imply 02724332/97/0800-0979$12.50/1 zyxwv 0 1997 Society for Risk Analysis 479