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Are risk averse agents more optimistic? A Bayesian estimation approach

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Author Info
Selima Benmansour (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)
Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)
Clotilde Napp (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
Jean-Michel Marin (INRIA Futurs - A3 - INRIA - Université Paris Sud - Paris XI)
Christian Robert (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)

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Abstract

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance.This quantity is of particular importance since it characterizes the consensus belief in risk-taking situations with heterogeneous beliefs. Its estimation leads to a nontrivial statistical problem. We start from a large lottery survey (1536 individuals). We assume that individuals have true unobservable characteristics and that their answers in the survey are noisy realizations of these characteristics. We adopt a Bayesian approach for the statistical analysis of this problem and use an hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We obtain that individuals are on average pessimistic and thatpessimism and risk tolerance are positively correlated. As a consequence, we conclude that theconsensus belief is biased towards pessimism.

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Paper provided by HAL in its series Working Papers with number halshs-00163678_v1.

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Date of creation: 17 Jul 2007
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Handle: RePEc:hal:wpaper:halshs-00163678_v1

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Related research
Keywords: Bayesian estimation; MCMC scheme; importance sampling; pessimism; risk tolerance; risk aversion; consensus belief.;

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  11. Elyès Jouini & Selima Ben Mansour & Clotilde Napp, 2006. "Is There a Pessimistic Bias in Individual Beliefs? Evidence from a Simple Survey," Post-Print halshs-00176518_v1, HAL. [Downloadable!]
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  12. Donkers, Bas & Melenberg, Bertrand & Van Soest, Arthur, 2001. " Estimating Risk Attitudes Using Lotteries: A Large Sample Approach," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 165-95, March. [Downloadable!] (restricted)
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  18. Morin, Roger A & Fernandez Suarez, Antonio, 1983. " Risk Aversion Revisited," Journal of Finance, American Finance Association, vol. 38(4), pages 1201-16, September. [Downloadable!] (restricted)
  19. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
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  20. Hans P. Binswanger, 1981. "Attitudes Toward Risk: Theoretical Implications of an Experiment in Rural India," Artefactual Field Experiments 0009, The Field Experiments Website. [Downloadable!]
  21. Powell, Melanie & Ansic, David, 1997. "Gender differences in risk behaviour in financial decision-making: An experimental analysis," Journal of Economic Psychology, Elsevier, vol. 18(6), pages 605-628, November. [Downloadable!] (restricted)
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