Risk Aversion, Wealth and Background Risk

Luigi Guiso and Michaela Pagel
Authors registered in the RePEc Author Service: 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; Risk aversion; Prudence (search for similar items in EconPapers)
JEL-codes: D10 D80 (search for similar items in EconPapers)
Date: 2001-03
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Citations: View citations in EconPapers (64)

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Related works:
Working Paper: Risk Aversion, Wealth, and Background Risk (2007)
Working Paper: Risk Aversion, Wealth and Background Risk (2004)
Working Paper: Risk Aversion, Wealth and Background Risk (2003)
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