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Are risk-averse agents more optimistic? A Bayesian estimation approach

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Author Info
Selima Ben Mansour (DRM, UMR-CNRS 7088, Université Paris-Dauphine, France)
Elyès Jouini (CEREMADE, UMR-CNRS 7534, Université Paris-Dauphine, France)
Jean-Michel Marin (INRIA Saclay, Projet SELECT, Laboratoire de Mathématiques, Université Paris-Sud, France)
Clotilde Napp (DRM, UMR-CNRS 7088, Université Paris-Dauphine, France)
Christian Robert (CEREMADE, UMR-CNRS 7534, Université Paris-Dauphine, France)

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Abstract

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance. Its estimation leads to a non-trivial statistical problem. We start from a large lottery survey (1536 individuals). We assume that individuals have true unobservable characteristics. We adopt a Bayesian approach and use a hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We find that individuals are on average pessimistic and that pessimism and risk tolerance are positively correlated. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.1027
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File URL: http://qed.econ.queensu.ca:80/jae/2008-v23.6/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 6 ()
Pages: 843-860
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Handle: RePEc:jae:japmet:v:23:y:2008:i:6:p:843-860

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  2. Schooley, Diane K. & Worden, Debra Drecnik, 1996. "Risk aversion measures: comparing attitudes and asset allocation," Financial Services Review, Elsevier, vol. 5(2), pages 87-99. [Downloadable!] (restricted)
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  11. Elyès Jouini & Selima Ben Mansour & Clotilde Napp, 2006. "Is There a Pessimistic Bias in Individual Beliefs? Evidence from a Simple Survey," Post-Print halshs-00176518_v1, HAL. [Downloadable!]
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  12. Donkers, Bas & Melenberg, Bertrand & Van Soest, Arthur, 2001. " Estimating Risk Attitudes Using Lotteries: A Large Sample Approach," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 165-95, March. [Downloadable!] (restricted)
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  16. Hariharan, Govind & Chapman, Kenneth S. & Domian, Dale L., 2000. "Risk tolerance and asset allocation for investors nearing retirement," Financial Services Review, Elsevier, vol. 9(2), pages 159-170, 00. [Downloadable!] (restricted)
  17. Gollier, Christian & Muermann, Alexander, 2006. "Optimal Choice and Beliefs with Ex Ante Savoring and Ex Post Disappointment," IDEI Working Papers 462, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  18. Morin, Roger A & Fernandez Suarez, Antonio, 1983. " Risk Aversion Revisited," Journal of Finance, American Finance Association, vol. 38(4), pages 1201-16, September. [Downloadable!] (restricted)
  19. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
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  20. Hans P. Binswanger, 1981. "Attitudes Toward Risk: Theoretical Implications of an Experiment in Rural India," Artefactual Field Experiments 0009, The Field Experiments Website. [Downloadable!]
  21. Powell, Melanie & Ansic, David, 1997. "Gender differences in risk behaviour in financial decision-making: An experimental analysis," Journal of Economic Psychology, Elsevier, vol. 18(6), pages 605-628, November. [Downloadable!] (restricted)
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