Why risk attitude differs between macro and micro level? A decoherence perspective

Zhen Yi, Chao Zhu and Yuwei Zhang

International Review of Economics & Finance, 2024, vol. 92, issue C, 978-997

Abstract: This paper aims to explain and solve the problem of the inconsistency of risk attitude between the micro and macro level, which theoretical models often ignore. There are significant differences between micro and macro level when using Chinese household-level and country-level data. We build a model with heterogeneous agents by introducing an interactive utility function and derive a compatible formula for estimating risk attitude. This formula restores the “Coherence” among micro individuals. In the explicit function form, we obtain an expression of the adjustment coefficient α, and then (1) macro risk attitude; (1) micro risk attitude; (3) the difference between them, and (4) what the difference comes from. From the logarithmic interactive utility function, the estimated RRA value is 5.7036, or approximately, the adjustment parameter. When taking the adjustment parameters into consideration, reserchers can obtain more accurate parameters. This paper inserts a term in the social utility function which summarizes the interaction between households and which leads to a modification of absolute/relative risk aversion. The contribution of the paper lies in an attempt at reconciling the micro and the macro parameter by referring to an insight borrowed from the “theory of decoherence” used in physics and help to set accurate parameters in utility function in the theoretical models.

Keywords: Risk attitudes; Decoherence; Additivity (search for similar items in EconPapers)
JEL-codes: D01 D81 E41 G00 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:92:y:2024:i:c:p:978-997

DOI: 10.1016/j.iref.2024.02.040

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