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Subjective Measures of Risk Aversion, Fixed Costs, and Portfolio Choice

Arie Kapteyn () and Federica Teppa

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: The paper investigates risk attitudes among different types of individuals. We use several different measures of risk attitudes, including questions on choices between uncertain income streams suggested by Barsky et al. (1997) and a number of ad hoc measures. As in Barsky et al. (1997) and Arrondel and Calvo-Pardo (2002), we first analyse individual variation in the risk aversion measures and explain them by background characteristics (both “objective characteristics and other subjective measures of risk preference). Next we incorporate the measured risk attitudes into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical measure. We provide a discussion of the reasons for this finding. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.          ÂÂ

Keywords: Risk Aversion; Portfolio Choice; Subjective Measures; Econometric Models; Fixed ÂÂ Costs. (search for similar items in EconPapers)
JEL-codes: C5 C9 D12 G11 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-upt
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Journal Article: Subjective measures of risk aversion, fixed costs, and portfolio choice (2011) Downloads
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