Asset Integration and Attitudes to Risk: Theory and Evidence

Steffen Andersen, James Cox, Glenn Harrison, Morten Lau, E. Elisabet Rutström and Vjollca Sadiraj
Authors registered in the RePEc Author Service: Elisabet Rutstrom

No 2012-12, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiment is consistent with partial asset integration: they behave as if some fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings.

JEL-codes: C55 C81 C91 C93 D01 D81 (search for similar items in EconPapers)
Pages: 39
Date: 2012-07, Revised 2017-10
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2012-12.pdf First version, 2012 (application/pdf)
http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2016-06.pdf Revised version, 2016 (application/pdf)
http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2017-06.pdf Revised version, 2017 (application/pdf)

Related works:
Working Paper: Asset Integration and Attitudes to Risk: Theory and Evidence (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:exc:wpaper:2012-12

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