Risk Aversion, Wealth and Background Risk

Luigi Guiso () and Monica Paiella

No 2728, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to enter a lottery. We relate this measure to consumers' endowment and attributes and to measures of background risk. We find that risk aversion is a decreasing function of endowment - thus rejecting CARA preferences – but that the elasticity to consumption is far below the unitary value predicted by CRRA utility. We also find that households' attributes are of little help in predicting their degree of risk aversion, which is characterized by massive unexplained heterogeneity. The consumers' environment, however, affects risk aversion. Individuals who are more likely to face income uncertainty exhibit a higher degree of absolute risk aversion, consistent with recent theories of attitudes towards risk in the presence of uninsurable risks. We also find that risk attitudes have considerable predictive power over several household decisions, including occupation and portfolio choice, moving decisions and health status.

Keywords: Background Risk; Heterogeneous Preferences; Prudence; Risk Aversion (search for similar items in EconPapers)
JEL-codes: D10 D80 (search for similar items in EconPapers)
Date: 2001-03
View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP2728.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Risk Aversion, Wealth and Background Risk (2004)
Working Paper: Risk Aversion, Wealth, and Background Risk (2007)
Working Paper: Risk Aversion, Wealth and Background Risk (2003)
Journal Article: Risk Aversion, Wealth, and Background Risk (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:2728

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP2728.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().