Risk Aversion, Entrepreneurial Risk, and Portfolio Selection
Do entrepreneurs consider the risk of their business equity when making investment portfolio allocations? Many people compartmentalize different risks and consider them separately, called mental accounting. Alternatively, the risk substitution hypothesis suggests that entrepreneurs would offset high business income risk by selecting a more conservative investment portfolio. we examine these two hypotheses which have implications for measuring risk tolerance. We find that households with proprietary income show higher risk tolerance than non-entrepreneurs do. Further evidence suggests that a comprehensive measure of relative risk aversion that incorporates households' business income is more reliable and more consistent with their reported risk preference than other measures that do not include business income. In supportive of the risk substitution hypothesis, households do appear to hedge the risk from their private business by decreasing their portion of other risky assets in their investment portfolio.
Volume (Year): 13 (2009)
Issue (Month): 2 (Fall)
|Contact details of provider:|| Postal: 24255 Pacific Coast Hwy, Malibu CA|
Web page: http://bschool.pepperdine.edu/jef
More information through EDIRC
References listed on IDEAS
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.:
- Donkers, Bas & van Soest, Arthur, 1999.
"Subjective measures of household preferences and financial decisions,"
Journal of Economic Psychology,
Elsevier, vol. 20(6), pages 613-642, December.
- Donkers, A.C.D. & van Soest, A.H.O., 1997. "Subjective measures of household preferences and financial decisions," Discussion Paper 1997-70, Tilburg University, Center for Economic Research.
- Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
- Fama, Eugene F & Schwert, G William, 1979. "Inflation, Interest, and Relative Prices," The Journal of Business, University of Chicago Press, vol. 52(2), pages 183-209, April.
- Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
- Don Bellante & Richard P. Saba, 1986. "Human Capital And Life-Cycle Effects On Risk Aversion," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 9(1), pages 41-51, 03.
- Sonya Seongyeon Lim, 2006. "Do Investors Integrate Losses and Segregate Gains? Mental Accounting and Investor Trading Decisions," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2539-2574, September.
- John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
- Joost M.E. Pennings & Ale Smidts, 2000. "Assessing the Construct Validity of Risk Attitude," Management Science, INFORMS, vol. 46(10), pages 1337-1348, October.
- John Y. Campbell, 2006.
NBER Working Papers
12149, National Bureau of Economic Research, Inc.
- Morin, Roger A & Fernandez Suarez, Antonio, 1983. " Risk Aversion Revisited," Journal of Finance, American Finance Association, vol. 38(4), pages 1201-1216, September.
- Schooley, Diane K. & Worden, Debra Drecnik, 1996. "Risk aversion measures: comparing attitudes and asset allocation," Financial Services Review, Elsevier, vol. 5(2), pages 87-99.
- Cohn, Richard A, et al, 1975. "Individual Investor Risk Aversion and Investment Portfolio Composition," Journal of Finance, American Finance Association, vol. 30(2), pages 605-620, May.
- Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
- Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
- James M. Poterba & Andrew Samwick, 1999.
"Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s,"
NBER Working Papers
7392, National Bureau of Economic Research, Inc.
- Poterba, James M. & Samwick, Andrew A., 2003. "Taxation and household portfolio composition: US evidence from the 1980s and 1990s," Journal of Public Economics, Elsevier, vol. 87(1), pages 5-38, January.
- Palich, Leslie E. & Ray Bagby, D., 1995. "Using cognitive theory to explain entrepreneurial risk-taking: Challenging conventional wisdom," Journal of Business Venturing, Elsevier, vol. 10(6), pages 425-438, November.
- Siegel, Frederick W & Hoban, James P, Jr, 1982. "Relative Risk Aversion Revisited," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 481-487, August.
- Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
When requesting a correction, please mention this item's handle: RePEc:pep:journl:v:13:y:2009:i:2:p:25-55. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Craig Everett)
If references are entirely missing, you can add them using this form.