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The Role Of Risk Aversion In Predicting Individual Behavior

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Author Info
Luigi Guiso () (Università degli Studi di Sassari)
Monica Paiella () (Bank of Italy)

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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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Paper provided by Bank of Italy, Economic Research Department 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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Related research
Keywords: risk aversion; heterogeneous preferences; choice under risk; entrepreneurship; self selection.;

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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March. [Downloadable!] (restricted)
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  8. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June. [Downloadable!]
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  20. Guiso, Luigi & Paiella, Monica, 2001. "Risk Aversion, Wealth and Background Risk," CEPR Discussion Papers 2728, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  21. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-53, April.
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  1. Dohmen, Thomas J & Falk, Armin & Huffman, David & Sunde, Uwe, 2008. "The Intergenerational Transmission of Risk and Trust Attitudes," CEPR Discussion Papers 6844, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Sarah Brown & Karl Taylor, 2006. "Education, Risk Preference and Wages," Working Papers 2006002, The University of Sheffield, Department of Economics, revised Feb 2006. [Downloadable!]
  3. Christian Belzil & Marco Leonardi, 2007. "Risk Aversion and Schooling Decisions," Post-Print halshs-00174507_v1, HAL. [Downloadable!]
    Other versions:
  4. Bartzsch, Nikolaus, 2006. "Precautionary saving and income uncertainty in Germany - new evidence from microdata," Discussion Paper Series 1: Economic Studies 2006,44, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  5. Christian Belzil & Marco Leonardi, 2006. "Can Risk Aversion Explain Schooling Attainments? Evidence From Italy," Working Papers 0607, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
    Other versions:
  6. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jurgen Schupp & Gert G. Wagner, 2005. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," Framed Field Experiments 0019, The Field Experiments Website. [Downloadable!]
    Other versions:
  7. Christian Belzil, 2007. "Subjective Beliefs and Schooling Decisions," IZA Discussion Papers 2820, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Dohmen, Thomas J & Falk, Armin & Huffman, David & Sunde, Uwe, 2008. "Are Risk Aversion and Impatience Related to Cognitive Ability?," CEPR Discussion Papers 6852, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Lisa R. Anderson & Jennifer M. Mellor, 2007. "Predicting Health Behaviors with an Experimental Measure of Risk Preference," Working Papers 59, Department of Economics, College of William and Mary. [Downloadable!]
    Other versions:
  10. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute. [Downloadable!]
    Other versions:
  11. Alejandra Cortes Aguilar & Antonio Espín Martín & Filippos Exadaktylos & Oyediran Segun & Luis Alejandro Palacios García & Antonios Proestakis, 2008. "Alcohol Consumption and Risk Attitude," ThE Papers 08/09, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
  12. Hoy, M. & Esuola, A. & Islam, Z. & Turvey, C., 2007. "Evaluating the Effects of Asymmetric Information in a Model of Crop Insurance," Working Papers 2007-6, University of Guelph, Department of Economics. [Downloadable!]
    Other versions:
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