Consumers’ Sense of Risk: Exposure to Financial Options

Researchers and the investment community continually debate whether consumers have the requisite acumen regarding financial instruments. We find that consumers have intuitive knowledge about uncertainty, and they intend to alleviate that uncertainty through a relatively sophisticated financial instrument, the option. In other words, consumers intuit levels of uncertainty regarding the environment in general, as well as products and services that they commonly purchase, and they indicate a willingness to pay for a financial product that will reduce this uncertainty. The owner of an option has the right, for a fee, to purchase a fixed amount of a product within a fixed timeframe for a fixed price. We capture uncertainty such as general environmental uncertainty (i.e., pre-COVID-19 and during COVID-19), product or service attributes (e.g., frequency and magnitude of price changes), as well as supply and demand conditions (e.g., change in supply and consumer control of consumption). Our results show a correlation between uncertainty and consumer likelihood to purchase an option for a reasonable amount of the product or service, during a reasonable period, and a fair price.