Investigating explanatory theories on laypeople’s risk perception of personal economic collapse in a bank crisis – the Cyprus case

Abstract

We investigate the explanatory power of decision, psychometric, and trust theory to describe laypeople’s risk perception of personal economic collapse in a bank crisis. The aim of this investigation is to improve the understanding of the effects of national initiatives for crisis fighting taken to prevent systemic risk. Using a stratified sample of 738 Cypriote citizens, we conducted an investigation in Cyprus in the spring of 2013 when the country was facing a bank crisis. At that point in time, the Cypriote Government had imposed capital controls to prevent a bank run. We find that decision theory variables alone have low explanatory value on laypeople’s risk perception, and that laypeople’s risk perception in this situation is affected primarily by psychometric variables. Further, confidence in one’s own bank also explains risk perception. Our findings contribute novel knowledge about risk perceptions in a financial crisis, with practical crisis management implications for regulators.

Keywords:

• risk perception
• bank crisis
• laypeople

Notes

1. Testimony of Alan Greenspan. The financial crisis and the role of federal regulators: Hearing before the House Committee on Oversight and Government Reform, 110th Cong., 2008.