The Components of Perceived Risk

Citation:

Jacob Jacoby and Leon B. Kaplan (1972) ,"The Components of Perceived Risk", in SV - Proceedings of the Third Annual Conference of the Association for Consumer Research, eds. M. Venkatesan, Chicago, IL : Association for Consumer Research, Pages: 382-393.

Proceedings of the Third Annual Conference of the Association for Consumer Research, 1972      Pages 382-393

THE COMPONENTS OF PERCEIVED RISK

Jacob Jacoby, Department of Psychological Sciences, Purdue University

Leon B. Kaplan, Advertising Research Department, E. I. DuPont

Since Bauer's seminal statement (1960), a considerable number of researchers have utilized the construct of perceived risk to investigate various aspects of consumer behavior. Unfortunately, this construct has more often than not been defined in different ways by different investigators. As a result, the risk literature contains numerous instances where findings of one study either conflict with or cannot be directly compared with those of another.

This state of affairs has been partially remedied by Roselius (1971), who incorporated numerous risk reduction strategies (e.g., attend to product rating services; engage in word-of-mouth conversations; solicit information from sales personnel; read relevant mass-media ads; etc.) into one study and established their relative order of importance. Yet, while we have begun to learn the manner in which commonly used risk reduction strategies are related to each other, the interrelationships existing among the various kinds of perceived risk (e.g., functional risk, psychological risk, financial risk, etc.) are still unknown. To the extent that one investigator manipulates one kind of risk and another utilizes a second type, it becomes difficult to meaningfully compare and assess the significance of these independent studies.

Accordingly, the purposes of this investigation were: (a) to identify the various types of risk referred to in the literature; (b) to determine their interrelationships; and (c) to determine their individual and collective relationship to overall perceived risk.

PROCEDURE

Identifying the Varieties of Perceived Risk

The consumer behavior literature on perceived risk was reviewed and the different varieties of perceived risk employed, whether as components of overall perceived risk or as operational definitions of it, were cataloged. Differences in terminology were disregarded when it was clear that the terms were functionally equivalent. In conjunction, a series of hypothetical purchase situations were conceptually developed and examined in terms of the types of risk potentially operative in each situation. Five types of perceived risk emerged from these procedures to subsume the types of risk found in the literature and generated by the hypothetical purchasing situation. These were: financial, performance, physical, psychological, and social risk. [Since this study was conducted (Spring 1970), Roselius (1971, p. 58) has identified a sixth variety of risk: "Time loss: when some products fail, we waste time, convenience, and effort getting it adjusted, repaired, or replaced."] On a conceptual level, these five dimensions can be considered functionally independent so that as one risk variety increases, the other risk varieties can either increase, decrease, or remain unaffected. Thus, while psychological and social risk are usually fused and treated as one (i.e., psycho-social risk), the former should probably be reserved for situations regarding how the individual perceives himself while the latter used to refer to the consumer's perception of how others will react to his purchase. As an example, if a 20-year old uses Geritol and does not tell anyone about it, it may affect the way he thinks of himself but would not necessarily affect the way others think of him.

It is interesting to note that these five risk varieties can be inferred from Bauer's original work (cf. 1960, p. 390). Moreover, considering overall perceived risk (OPR) as consisting of several independent varieties of risk suggests situations in which the consumer will engage in risk "tradeoff" behavior. Buying a high-whitening (and possible highly abrasive) toothpaste may decrease social risk while increasing physical risk. Similarly, the housewife purchasing an expensive cut of meat for a dinner party she is giving is decreasing performance and social risks while increasing financial risk.

Assessing the Interrelationships Among the Varieties of Perceived Risk

Operationalizing the varieties of perceived risk. Table 1 contains the operational definitions of the five varieties of risk and of OPR. These definitions were constructed to be as basic and as uniform as possible, and were judged to be clear enough to permit trained subjects to have similar ideas as to what each of the types of risk meant. Cunningham's (1967, pp. 104-105) notion of general versus specific risk levels were also considered. The definitions are general, though a specific object (an unfamiliar brand) is the focus of the rating. Substitution of a brand name without altering the structure of the operational definition is easily accomplished.

TABLE 1

OPERATIONAL DEFINITIONS OF THE VARIETIES OF PERCEIVED RISK

Subjects. The subjects, 148 upper-classmen at Purdue University enrolled in Consumer Psychology during the spring 1970 semester, were not naive, having just completed a two-hour section on the topic of perceived risk, with each of the risk varieties defined as in Table 1.

Instrument. A questionnaire was developed to measure both the amount of each specific type of perceived risk as well as the overall perceived risk these subjects associated with 12 different consumer products. Products were intuitively selected to cover a substantial portion of the overall perceived risk continuum. An assortment of health, recreational, and hygienic products, varying along an expensive-inexpensive dimension and including products bought for self and for others, highly visible and low profile items, intimate and non-intimate products were utilized. The only restriction was that the products be appropriate for both sexes. The number of products was limited to 12 to reduce respondent fatigue and to minimize the introduction of error.

Each page of the questionnaire assessed one component of perceived risk separately for each of the 12 products. The top of each page contained the definition of each component.

RESULTS

Table 2 contains the means and standard deviations for the risk ratings within each product category. The products are ordered in terms of mean OPR value. The ranking tends to be consistent with what would be expected if the products were ordered simply by price alone. In addition, a certain degree of construct validity was established in that the order of risk components was the same within meaningful clusters of products. For example, the rank order of the risk components for the three products which were items of apparel (i.e., suit, overcoat, and dress shoes) was identical and went from social risk, through psychological, financial, and performance risk to physical risk. Similarly, the rank order of components for three of the drug products (i.e., toothpaste, vitamins, and aspirins) was the same and went from physical risk through performance, financial, and social risk to psychological risk. It would seem that similar types of products have similar risk component hierarchies.

The product categories ranked by their mean values on each of the risk components are displayed in Table 3. Examination of the financial risk column indicates that the mean values go through a gradual diminution until dress shoes, then there is a drop in mean value of 1.59 (5.14 to 3.55) for deodorants, and then the means continue their modest decrementation. This pattern has some interesting implications for the relationships between actual price and perceived financial risk. While there seems to be a monotonic relationship between actual price and perceived financial risk, it appears to be curvilinear. At the extreme upper end of the price continuum (foreign sports car and life insurance) actual dollar value is less important than is relative cost. The level of measurement seems to have shifted from interval to ordinal. The most meaningful price break (for the sample of college students used) should occur between shoes ($15 - $35) and the $2 - $3 items (deodorants, razor blades, etc.), and that appears to be what happened as evidenced by the discontinuity in Table 3.

TABLE 2

MEANS AND STANDARD DEVIATIONS FOR PERCEIVED RISK RATINGS WITHIN EACH PRODUCT CATEGORY

TABLE 3

RANKING OF PRODUCTS BY MEAN RISK VALUES FOR EACH TYPE OF PERCEIVED RISK

TABLE 4

RANKING OF CORRELATIONS BETWEEN TYPE OF RISK AND OVERALL PERCEIVED RISK FOR EACH PRODUCT

An analogous situation would seem to exist for social risk. The most severe break in mean values occurs between color TV and life insurance (6.11 to 4.78). A color TV and the product rates above it on social risk (sports cars, suits, coats, and shoes) are all highly visible relative to life insurance and the remaining, lower-rated products.

Another observation which has implications for the validity of the measurement technique is that the three items of apparel cluster next to each other on every risk dimension except financial, and even there only one product (color TV] intrudes on the trio

Table 4 contains the ranking of the correlations between OPR and its components. It is interesting to note that performance risk correlates highest with OPR in 8 of the 12 product categories, and second highest in another three categories. This would support the selection of performance risk as an approximation of OPR by many of the risk researchers. Financial risk has the highest correlation in two product categories (life insurance and deodorants), social risk in one (dress shoes), and physical risk in another (vitamins).

Table 5 contains the correlation between OPR and its hypothesized components across the 12 products examined in this study. As would be expected from Table 4, performance risk correlates highest with OPR (.654) and is followed closely by financial risk (.627).

TABLE 5

CORRELATIONS BETWEEN THE RISK COMPONENTS AND OVERALL PERCEIVED RISK ACROSS THE 12 PRODUCT CATEGORIES

Table 6 contains the summary tables of a stepwise multiple regression used to predict OPR from its component values. The multiple r's range from a low of .6354 for foreign sports cars to a high of .8330 for razor blades. All are significant at p < .0001. This means that from 40% to nearly 70% of the variance associated with the OPR ratings can be accounted for by the five putative varieties of perceived risk outlined here. It also seems that as price rises, the rm's decrease. This suggests that some price-related aspect of OPR is not being accounted for by the five components and, as price rises, this variable becomes increasingly important in the estimation of OPR. This price-related aspect of OPR would seem to be independent of financial risk because financial risk enters the regression equation earlier for the last six products (mean value - 2.5) than for the first six products (mean value = 3.3).

TABLE 6

SUMMARY TABLE FOR PREDICTING OVERALL PERCEIVED RISK FROM ITS COMPONENT VALUES

Table 7 summarizes the results of trying to predict OPR from its components across all 12 product categories. The five components accounted for 61.6% of the variance in OPR (p < .0001). In stepwise regression that variable correlating most highly with the criterion enters the equation first. This obviously was performance risk. In the second step, the variable accounting for most of the residual variance is entered. Social risk was the second variable to enter the regression equation. In a like fashion, financial, physical, and psychological risk were entered.

TABLE 7

SUMMARY TABLE FOR PREDICTING OVERALL PERCEIVED RISK FROM ITS COMPONENT VALUES ACROSS ALL 12 PRODUCT CATEGORIES

Comparing Table 7 with Table 5, which contains the mean correlation between each component and OPR, it can be seen that social risk and financial risk have reversed positions, as did physical and psychological risk. Table 8, the intercorrelation matrix of the components, explains the discrepancy. The highest intercorrelation between variables (.655) occurs between performance and financial risk and, of the remaining variables, social risk has the lowest correlation with performance risk t.428). The second highest correlation between components is between social and psychological risk (.605). This probably explainS why psychological risk entered the equation last. Interestingly, all the coefficients of Table 8 are significant at z < .01, implying that, at least as operationalized in this investigation, the components of perceived risk are not independent.

TABLE 8

INTERCORRELATION MATRIX FOR THE FIVE TYPES OF RISK, CALCULATED ACROSS THE 12 PRODUCT CATEGORIES

DISCUSSION

Perhaps the most basic finding of this investigation is that overall perceived risk can_be predicted fairly well from five putative components -financial performance, physical, psychological, and social risk. The resulting r2's ranged from 40% to 70% (all significant at p < .0001), with a median of 55% across the 12 product categories. These results suggest that the varieties of perceived risk and overall perceived risk are related in a manner such as is depicted by the following formula:

OPR =  f(Uncertainty of Financial Risk X Consequences of Financial Risk; Uncertainty of Performance Risk X Consequences of Performance Risk; Uncertainty of Physical Risk X Consequences of Physical Risk; Uncertainty of Psychological Risk X Consequences of Psychological Risk; Uncertainty of Social Risk X Consequences of Social Risk); + error.

In addition to its predictive validity, these analyses demonstrate construct validity. In examining the mean values for each component on a product-by-product basis (cf. Table 2), the similar ranking of the components for the three items of apparel (i.e., suit, winter coat, and dress shoes) was noted, as was the similarity for three drug products (i.e., toothpaste, vitamins, and aspirin). It would seem that similar types of products possess similar risk component hierarchies.

Finally, the basic significance of this investigation lies in the fact that it appears to represent the first comprehensive attempt to examine the interrelationship of the various types of perceived risk to each other as well as to overall perceived risk. Outlining these relationships should facilitate making meaningful and valid comparisons across investigations which employ different types of perceived risk.

REFERENCES

Bauer, R. A. Consumer behavior as risk taking. In R. S. Hancock (Ed.), Dynamic marketing for a changing world. Chicago: American Marketing Association, 1960, 389-398.

Cunningham, S. M. The major dimensions of perceived risk. In D. F. Cox (Ed.), Risk taking and information handling in consumer behavior. Cambridge, Mass.: Harvard University Press, 1967, 82-108.

Roselius, T. Consumer rankings of risk reduction methods. Journal of Marketing, 1971, 35, 56-61.

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