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The Role of Risk Aversion in Predicting Individual Behaviours

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  • Guiso, Luigi
  • Paiella, Monica

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 consumers’ 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4591.

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Date of creation: Sep 2004
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Handle: RePEc:cpr:ceprdp:4591

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Keywords: heterogenous preferences; individual choice; risk aversion;

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