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The Role Of Risk Aversion In Predicting Individual Behavior

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  • Luigi Guiso

    () (Università degli Studi di Sassari)

  • Monica Paiella

    () (Bank of Italy)

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 buy a risky asset. We relate this measure to a set of consumersÂ’ decisions that in theory should vary with attitude towards risk. We find that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 546.

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Date of creation: Feb 2005
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Handle: RePEc:bdi:wptemi:td_546_05

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Keywords: risk aversion; heterogeneous preferences; choice under risk; entrepreneurship; self selection.;

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