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Asset Integration and Attitudes to Risk: Theory and Evidence

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Author Info

  • Steffen Andersen

    ()
    (Copenhagen Business School)

  • James C. Cox

    (Robinson College of Business, Georgia State University)

  • Glenn W. Harrison

    ()
    (Robinson College of Business, Georgia State University)

  • Morten Lau

    ()
    (Durham Business School)

  • Elisabet E. Rutstroem

    ()
    (Robinson College of Business, Georgia State University)

  • Vjollca Sadiraj

    (Robinson College of Business, Georgia State University)

Abstract

Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiments is consistent with partial asset integration: they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings.

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Bibliographic Info

Paper provided by Durham University Business School in its series Working Papers with number 2011_10.

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Date of creation: 14 Sep 2011
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Handle: RePEc:dur:durham:2011_10

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Postal: Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England
Phone: +44 (0)191 334 5200
Fax: +44 (0)191 334 5201
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Web page: http://www.dur.ac.uk/business
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References

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  1. Glenn Harrison & John List & Charles Towe, 2004. "Naturally occurring preferences and exogenous laboratory experiments: A case study of risk aversion," Framed Field Experiments 00155, The Field Experiments Website.
  2. Wilcox, Nathaniel, 2007. "Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk," MPRA Paper 11851, University Library of Munich, Germany.
  3. James Cox & Vjollca Sadiraj & Bodo Vogt & Utteeyo Dasgupta, 2013. "Is there a plausible theory for decision under risk? A dual calibration critique," Economic Theory, Springer, vol. 54(2), pages 305-333, October.
  4. John List & David Reiley, 2008. "Field experiments," Artefactual Field Experiments 00091, The Field Experiments Website.
  5. Steffen Andersen & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem, 2011. "Discounting Behavior: A Reconsideration," Working Papers 2011_01, Durham University Business School.
  6. Vjollca Sadiraj, 2012. "Probabilistic Risk Attitudes and Local Risk Aversion: a Paradox," Experimental Economics Center Working Paper Series 2012-07, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  7. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05.
  8. James C. Cox & Vjollca Sadiraj & Ulrich Schmidt, 2011. "Paradoxes and Mechanisms for Choice under Risk," Experimental Economics Center Working Paper Series 2011-07, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Mar 2014.
  9. Cox, James C. & Sadiraj, Vjollca, 2006. "Small- and large-stakes risk aversion: Implications of concavity calibration for decision theory," Games and Economic Behavior, Elsevier, vol. 56(1), pages 45-60, July.
  10. William Neilson, 2001. "Calibration results for rank-dependent expected utility," Economics Bulletin, AccessEcon, vol. 4(10), pages 1-5.
  11. Steffen Andersen & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem, 2011. "Intertemporal Utility and Correlation Aversion," Working Papers 2011_03, Durham University Business School.
  12. James C. Cox & Vjollca Sadiraj, 2008. "Risky Decisions in the Large and in the Small: Theory and Experiment," Experimental Economics Center Working Paper Series 2008-01, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
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Cited by:
  1. Marcel Fafchamps & Bereket Kebede & Daniel John Zizzo, 2014. "Keep Up With the Winners: Experimental Evidence on Risk Taking, Asset Integration, and Peer Effects," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 14-03, School of Economics, University of East Anglia, Norwich, UK..
  2. Nejat Anbarci & Nick Feltovich, 2012. "How responsive are people to changes in their bargaining position? Earned bargaining power and the 50–50 norm," Economics Series 2012_6, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  3. Lionel Page & David Savage & Benno Torgler, 2012. "Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster," NCER Working Paper Series 83, National Centre for Econometric Research, revised 09 Jul 2012.
  4. Paolo Falco, 2013. "Does risk matter for occupational choices? Experimental evidence from an African labour market," CSAE Working Paper Series 2013-15, Centre for the Study of African Economies, University of Oxford.
  5. Lionel Page & David A. Savage & Benno Torgler, 2013. "Variation in risk seeking behavior following large losses: A natural experiment," QuBE Working Papers 007, QUT Business School.

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