An important proposition underlying prospect theory is the notion that when decision-makers must choose between options with gains and losses, their preference for positive outcomes often mirrors their preference for negative outcomes. This is called the reflection effect. This paper aimed to test the extent to which the reflection effect is associated with household finance outcomes. A secondary goal was to determine whether different risk preference groups, based on categorised reflection effect responses (i.e., risk avoiders, loss averse, loss tolerant and risk seekers), share common demographic characteristics. Findings, based on internet survey data from more than 40,000 individuals aged 35 or older, showed that individuals, on average, exhibit the reflection effect. The results also confirmed that there are differences in behaviour across risk categories, but that it is difficult to cluster decision-makers into a risk category using demographic characteristics. Specifically, a decision-maker’s risk profile falls on a risk continuum. While some decision-makers may be risk avoiders and others are risk seekers, many decision-makers will fall somewhere between these extremes. Risk avoiders were much more likely to make choices that minimised the possibility of loss. Risk seekers were more inclined to make choices that provided high potential returns even if the probability of a gain was low. Loss averse decision-makers preferred low to middle-low risk alternatives. On the other hand, loss tolerant decision-makers preferred choices that provided middle-low or middle-high outcomes. It was determined that the use of demographic factors as descriptors of risk categories was rather weak. From a financial services perspective, it would be ideal if a demographic profile could be developed to explain who or what type of decision-maker would most likely fall into one of the four risk preference categories.
