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Estimating Risk Attitudes Using Lotteries: A Large Sample Approach

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  • Donkers, Bas
  • Melenberg, Bertrand
  • Van Soest, Arthur

Abstract

Attitudes towards risk play a major role in many economic decisions. In empirical studies it is quite often assumed that attitudes towards risk do not vary across individuals. This paper questions this assumption and analyses which factors influence an individual's risk attitude. Based on questions on lotteries in a large household survey we first semiparametrically estimate an index for risk aversion. We only make weak assumptions about the underlying decision process and our estimation method allows for generalisations of expected utility. We then estimate a structural model based on Cumulative Prospect Theory. Expected utility is strongly rejected and both the value function and the probability weighting function vary significantly with (among other things) age, income, and wealth of the individual. Copyright 2001 by Kluwer Academic Publishers

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  • 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 165-195, March.
    • Handle: RePEc:kap:jrisku:v:22:y:2001:i:2:p:165-95
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