Models towards Risk Behavior Prediction and Analysis: A Netherlands Case study

Abstract: In many countries financial service providers have to elicit their customers risk preferences, when offering products and services. For instance, in the Netherlands pension funds will be legally obliged to factor in their clients risk preferences when devising their investment strategies. Therefore, assessing and measuring the risk preferences of individuals is critical for the analysis of individuals' behavior and policy prescriptions. In the psychology and economics, a number of methods to elicit risk preferences have been developed using hypothetical scenarios and economic experiments. These methods of eliciting individual risk preferences are usually applied to small samples because they are expensive and the implementation can be complex and not suitable when large cohorts need to be measured. A large number of supervised learning models ranging from linear regression to support vector machines are used to predict risk preference measures using socio-economic register data such as age, gender, migration background and other demographic variables in combination with data on income, wealth, pension fund contributions, and other financial data. The employed machine learning models cover a range of assumptions and properties as well as a diverse set of regression metrics. The optimum model is selected using the metrics and interpretability of the model. The optimal models are lasso regression and gradient boosting machines with mean average percentage error of about 30%. This is important as it helps to estimate risk attitudes without actually measuring them. It should be noted that with the current accuracy the tested models are not ready for deployment for applications that require high accuracy. However, the results do indicate which models should be used in situations that do not require the most accurate predictions such as augmentation data for pensions' recommendation.