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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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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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References listed on IDEAS
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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  22. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, 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.)

  1. Harabi, Najib & Hespeler, Frank, 2001. "Electronic Commerce: Case Studies from Switzerland," MPRA Paper 4444, University Library of Munich, Germany. [Downloadable!]
  2. 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!]
  3. 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!]
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  4. Christian Belzil, 2007. "Subjective Beliefs and Schooling Decisions," IZA Discussion Papers 2820, Institute for the Study of Labor (IZA). [Downloadable!]
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  5. Christian Belzil & Marco Leonardi, 2007. "Risk Aversion and Schooling Decisions," IZA Discussion Papers 2994, Institute for the Study of Labor (IZA). [Downloadable!]
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  6. Yao, Jean-Marie, 2007. "International Financial Centers specialisation in investment funds activities," MPRA Paper 4512, University Library of Munich, Germany. [Downloadable!]
  7. Sarah Brown & Karl Taylor, 2006. "Education, Risk Preference and Wages," Working Papers 2006002, The University of Sheffield, Department of Economics, revised Feb 2006. [Downloadable!]
  8. Massimiliano Affinito & Matteo Piazza, 2008. "What are borders made of? An analysis of barriers to European banking integration," Temi di discussione (Economic working papers) 666, Bank of Italy, Economic Research Department. [Downloadable!]
  9. Andrea Mercatanti, 2008. "A likelihood-based analysis for relaxing the exclusion restriction in randomized experiments with imperfect compliance," Temi di discussione (Economic working papers) 683, Bank of Italy, Economic Research Department. [Downloadable!]
  10. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2008. "The Intergenerational Transmission of Risk and Trust Attitudes," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  11. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini & Marco Taboga, 2008. "Portfolio Selection with Monotone Mean-Variance Preferences," Temi di discussione (Economic working papers) 664, Bank of Italy, Economic Research Department. [Downloadable!]
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  12. Reggiani, Tommaso, 2007. "Book Review to Luigino Bruni -'RECIPROCITA': Dynamics of Cooperation, Economy and Civil Society," MPRA Paper 2880, University Library of Munich, Germany, revised 01 Jan 2007. [Downloadable!]
  13. Yao, Jean-Marie, 2006. "Investors and managers relationship in investment funds industry," MPRA Paper 4543, University Library of Munich, Germany, revised Jun 2007. [Downloadable!]
  14. 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:
  15. Christian Belzil & Marco Leonardi, 2006. "Can Risk Aversion Explain Schooling Attainments? Evidence From Italy," Post-Print halshs-00142551_v1, HAL. [Downloadable!]
    Other versions:
  16. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute. [Downloadable!]
    Other versions:
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