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Subjective Measures of Risk Aversion, Fixed Costs, and Portfolio Choice

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  • Arie Kapteyn
  • Federica Teppa

Abstract

The paper investigates risk attitudes among different types of individuals. We use several different measures of risk attitudes, including questions on choices between uncertain income streams suggested by Barsky et al. (1997) and a number of ad hoc measures. As in Barsky et al. (1997) and Arrondel and Calvo-Pardo (2002), we first analyse individual variation in the risk aversion measures and explain them by background characteristics (both “objective” characteristics and other subjective measures of risk preference). Next we incorporate the measured risk attitudes into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical” measure. We provide a discussion of the reasons for this finding. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.          ÂÂÂ

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 216.

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Date of creation: Jul 2009
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Handle: RePEc:dnb:dnbwpp:216

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Keywords: Risk Aversion; Portfolio Choice; Subjective Measures; Econometric Models; Fixed �� Costs.;

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Citations

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Cited by:
  1. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
  2. Arrondel, Luc & Masson, André, 2011. "L'épargnant dans un monde en crise — Ce qui a changé," Opuscules du CEPREMAP, CEPREMAP, number 23, May.
  3. Luc Arrondel & André Masson, 2013. "Measuring savers' preferences how and why?," PSE Working Papers halshs-00834203, HAL.
  4. Federica Teppa & Maarten van Rooij, 2012. "Are Retirement Decisions Vulnerable to Framing Effects? Empirical Evidence from NL and the US," DNB Working Papers 366, Netherlands Central Bank, Research Department.
  5. repec:hal:wpaper:halshs-00834203 is not listed on IDEAS
  6. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2011. "Financial Literacy, Retirement Planning, and Household Wealth," DNB Working Papers 313, Netherlands Central Bank, Research Department.
  7. Gandelman, Néstor & Hernández-Murillo, Rubén, 2013. "What do happiness and health satisfaction data tell us about relative risk aversion?," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 301-312.
  8. Arrondel, Luc & Masson, André, 2010. "La crise a-t-elle rendu l'épargnant plus prudent ?," Economics Papers from University Paris Dauphine 123456789/9827, Paris Dauphine University.
  9. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2009. "Financial Literacy and Retirement Planning in the Netherlands," DNB Working Papers 231, Netherlands Central Bank, Research Department.
  10. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
  11. Sarah Necker & Michael Ziegelmeyer, 2014. "Household Risk Taking after the Financial Crisis," BCL working papers 85, Central Bank of Luxembourg.
  12. Gandelman, Nestor & Hernandez-Murillo, Ruben, 2014. "Risk Aversion at the Country Level," Working Papers 2014-5, Federal Reserve Bank of St. Louis.

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