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Subjective Measures of Risk Aversion and Portfolio Choice

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Author Info
Arie Kapteyn
Federica Teppa

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Abstract

The paper investigates risk attitudes among different types of individuals. The authors 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 (2002), the authors 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, the authors incorporate the measured risk attitudes into a household partfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios. The authors results show that the Barsky et al. (1997) measure has little explanatory power, whereas ad hoc measures do a considerably better job. The authors provide a discussion of the reasons for this finding.

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Paper provided by RAND Corporation Publications Department in its series Working Papers with number 02-03.

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Length: 40 pages
Date of creation: Feb 2002
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Handle: RePEc:ran:wpaper:02-03

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Related research
Keywords: risk aversion; portfolio choice; subjective measures; econometric models;

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Find related papers by JEL classification:
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
C9 - Mathematical and Quantitative Methods - - Design of Experiments
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Shlomo Benartzi & Richard H. Thaler, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March. [Downloadable!] (restricted)
  3. Jermann, Urban J., 2002. "International portfolio diversification and endogenous labor supply choice," European Economic Review, Elsevier, vol. 46(3), pages 507-522, March. [Downloadable!] (restricted)
    Other versions:
  4. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  5. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Linda L. Tesar & Ingrid M. Werner, 1994. "International Equity Transactions and U.S. Portfolio Choice," NBER Chapters, in: The Internationalization of Equity Markets, pages 185-227 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Tesar, L.L. & Werner, I.M., 1992. "Home Bias and the Globalization of Securities Markets," University of California at Santa Barbara, Economics Working Paper Series 16-92, Department of Economics, UC Santa Barbara.
  8. Michael Haliassos & Christis Hassapis, 2002. "Equity culture and household behavior," Oxford Economic Papers, Oxford University Press, vol. 54(4), pages 719-745, October.
  9. Glassman, Debra A. & Riddick, Leigh A., 2001. "What causes home asset bias and how should it be measured?," Journal of Empirical Finance, Elsevier, vol. 8(1), pages 35-54, March. [Downloadable!] (restricted)
  10. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249.
  11. French, Kenneth R. & Poterba, James M., 1990. "Japanese and U.S. cross-border common stock investments," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 476-493, December. [Downloadable!] (restricted)
  12. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(1), pages 45-60. [Downloadable!] (restricted)
  13. Linda L. Tesar & Ingrid M. Werner, 1994. "International Equity Transactions and U.S. Portfolio Choice," NBER Working Papers 4611, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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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. Paun, Cristian & Brasoveanu, Iulian & Musetescu, Radu, 2007. "Absolute Risk Aversion on the Romanian Capital Market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 4(4), pages 77-87, December. [Downloadable!]
  2. Nataliya Barasinska & Dorothea Schäfer & Andreas Stephan, 2008. "Financial Risk Aversion and Household Asset Diversification," SOEPpapers 117, DIW Berlin, The German Socio-Economic Panel (SOEP). [Downloadable!]
    Other versions:
  3. Maarten van Rooij & Federica Teppa, 2008. "Choice or No Choice: What explains the Attractiveness of Default Options?," DNB Working Papers 165, Netherlands Central Bank, Research Department. [Downloadable!]
  4. Maarten C.J. van Rooij & Clemens J.M. Kool & Henriette M. Prast, 2004. "Risk-return preferences in the pension domain: are people able to choose?," Working Papers 05-04, Utrecht School of Economics. [Downloadable!]
    Other versions:
  5. Stefano Iezzi, 2008. "Investors' risk attitude and risky behavior: a Bayesian approach with imperfect information," Temi di discussione (Economic working papers) 692, Bank of Italy, Economic Research Department. [Downloadable!]
  6. Luc Arrondel & Hector Calvo-Pardo, 2002. "Portfolio Choice with a Correlated Background Risk : Theory and Evidence," DELTA Working Papers 2002-16, DELTA (Ecole normale supérieure). [Downloadable!]
  7. Beckmann, Daniela & Menkhoff, Lukas, 2008. "Will Women Be Women? Analyzing the Gender Difference among Financial Experts," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-391, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  8. 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:
  9. Ivo Vlaev & Nick Chater & Neil Stewart, 2007. "Relativistic financial decisions: Context effects on retirement saving and investment risk preferences," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 2, pages 292-311, October. [Downloadable!]
  10. James Poterba & Joshua Rauh & Steven Venti & David Wise, 2003. "Utility Evaluation of Risk in Retirement Saving Accounts," NBER Working Papers 9892, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Nosic, Alen & Weber, Martin, 2007. "Determinants of Risk Taking Behavior: The role of Risk Attitudes, Risk Perceptions and Beliefs," Sonderforschungsbereich 504 Publications 07-56, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  12. Luc Arrondel & André Masson, 2005. "Risk and time preferences: Saver types," PSE Working Papers 2005-33, PSE (Ecole normale supérieure). [Downloadable!]
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