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Pure Rank Preferences and Variation in Risk-Taking Behavior

Author

Listed:
  • Stark, Oded

    (University of Bonn)

  • Budzinski, Wiktor

    (University of Warsaw)

  • Jakubek, Marcin

    (Institute of Economics, Polish Academy of Sciences)

Abstract

Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual's risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

Suggested Citation

  • Stark, Oded & Budzinski, Wiktor & Jakubek, Marcin, 2019. "Pure Rank Preferences and Variation in Risk-Taking Behavior," IZA Discussion Papers 12637, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12637
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    References listed on IDEAS

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    1. Gregory, Nathaniel, 1980. "Relative Wealth and Risk Taking: A Short Note on the Friedman-Savage Utility Function," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1226-1230, December.
    2. Oded Stark, 2019. "On Social Preferences and the Intensity of Risk Aversion," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(3), pages 807-826, September.
    3. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    4. Weiss, Yoram & Fershtman, Chaim, 1998. "Social status and economic performance:: A survey," European Economic Review, Elsevier, vol. 42(3-5), pages 801-820, May.
    5. Frank, Robert H, 1997. "The Frame of Reference as a Public Good," Economic Journal, Royal Economic Society, vol. 107(445), pages 1832-1847, November.
    6. Smith, Adam, 1759. "The Theory of Moral Sentiments," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1759.
    7. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-857, July.
    8. Easterlin, Richard A., 1974. "Does Economic Growth Improve the Human Lot? Some Empirical Evidence," MPRA Paper 111773, University Library of Munich, Germany.
    9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
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    Cited by:

    1. Oded Stark, 2020. "Relative deprivation as a cause of risky behaviors," The Journal of Mathematical Sociology, Taylor & Francis Journals, vol. 44(3), pages 138-146, July.
    2. Stark, Oded & Jakubek, Marcin, 2020. "A methodological rejoinder to "Does income relate to health due to psychosocial or material factors?"," Social Science & Medicine, Elsevier, vol. 259(C).
    3. Stark, Oded & Budzinski, Wiktor & Jakubek, Marcin, 2022. "Risk aversion when preferences are altruistic," Economics Letters, Elsevier, vol. 216(C).
    4. Pak, Tae-Young, 2023. "Relative deprivation and financial risk taking✰," Finance Research Letters, Elsevier, vol. 55(PA).

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    More about this item

    Keywords

    relative risk aversion; rank-based utility; variation in risk-taking behavior; rank in the wealth distribution;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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