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The Role of Risk Aversion in Predicting Individual Behaviour

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Author Info
Monica Paiella
Luigi Guiso

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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 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 Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 222.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:222

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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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  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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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. 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. Christian Belzil & Marco Leonardi, 2007. "Risk Aversion and Schooling Decisions," Post-Print halshs-00174507_v1, HAL. [Downloadable!]
    Other versions:
  3. 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:
  4. 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:
  5. 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:
  6. 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!]
  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. 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:
  9. Christian Belzil, 2007. "Subjective Beliefs and Schooling Decisions," IZA Discussion Papers 2820, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. 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:
  11. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute. [Downloadable!]
    Other versions:
  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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