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Subjective measures of risk aversion, fixed costs, and portfolio choice

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  • Kapteyn, Arie
  • Teppa, Federica

Abstract

The paper investigates risk preferences among different types of individuals. We use several different measures of risk preferences, including questions on choices between uncertain income streams suggested by Barsky, Juster, Kimball, and Shapiro (1997) and a number of ad hoc measures. As in (Barsky et al., 1997) and (Arrondel and Calvo-Pardo, 2002), we first analyze 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 preferences 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, suggesting that sophisticated measures based on economic theory may exceed the financial capability of respondents. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 32 (2011)
Issue (Month): 4 (August)
Pages: 564-580

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Handle: RePEc:eee:joepsy:v:32:y:2011:i:4:p:564-580

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Keywords: Risk aversion Portfolio choice Subjective measures Econometric models Fixed costs;

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Citations

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Cited by:
  1. Masson, André & Arrondel, Luc, 2011. "L'épargnant dans un monde en crise. Ce qui a changé," Economics Papers from University Paris Dauphine 123456789/7001, Paris Dauphine University.
  2. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
  3. Arrondel, Luc & Masson, André, 2010. "La crise a-t-elle rendu l'épargnant plus prudent ?," Economics Papers from University Paris Dauphine 123456789/9827, Paris Dauphine University.
  4. Necker, Sarah & Ziegelmeyer, Michael, 2014. "Household Risk Taking after the Financial Crisis," MEA discussion paper series 14279, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  5. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2011. "Financial Literacy, Retirement Planning, and Household Wealth," CeRP Working Papers 119, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  6. Gandelman, Néstor & Hernández-Murillo, Rubén, 2013. "What do happiness and health satisfaction data tell us about relative risk aversion?," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 301-312.
  7. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
  8. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2009. "Financial Literacy and Retirement Planning in the Netherlands," DNB Working Papers 231, Netherlands Central Bank, Research Department.
  9. repec:hal:wpaper:halshs-00834203 is not listed on IDEAS
  10. Federica Teppa & Maarten van Rooij, 2012. "Are Retirement Decisions Vulnerable to Framing Effects? Empirical Evidence from NL and the US," DNB Working Papers 366, Netherlands Central Bank, Research Department.
  11. Gandelman, Nestor & Hernandez-Murillo, Ruben, 2014. "Risk Aversion at the Country Level," Working Papers 2014-5, Federal Reserve Bank of St. Louis.
  12. Luc Arrondel & André Masson, 2013. "Measuring savers' preferences how and why?," PSE Working Papers halshs-00834203, HAL.

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