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The Role Of Risk Aversion In Predicting Individual Behavior

  • Luigi Guiso

    ()

    (Universit� degli Studi di Sassari)

  • Monica Paiella

    ()

    (Bank of Italy)

We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers� decisions that in theory should vary with attitude towards risk. We find that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 546.

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Date of creation: Feb 2005
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Handle: RePEc:bdi:wptemi:td_546_05
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  1. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  2. 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.
  3. Daveri, Francesco & Faini, Riccardo, 1999. "Where Do Migrants Go?," Oxford Economic Papers, Oxford University Press, vol. 51(4), pages 595-622, October.
  4. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
  5. Renate Schubert, 1999. "Financial Decision-Making: Are Women Really More Risk-Averse?," American Economic Review, American Economic Association, vol. 89(2), pages 381-385, May.
  6. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October.
  7. Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  9. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  11. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  12. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
  13. Brunello, Giorgio, 2000. "Absolute Risk Aversion and the Returns to Education," IZA Discussion Papers 192, Institute for the Study of Labor (IZA).
  14. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2002. "Does Local Financial Development Matter?," NBER Working Papers 8923, National Bureau of Economic Research, Inc.
  15. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
  16. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-53, April.
  17. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  18. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
  19. Christopher D Carroll, 2000. "Portfolios of the Rich," Economics Working Paper Archive 430, The Johns Hopkins University,Department of Economics.
  20. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA.
  21. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-71, September.
  22. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  23. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  24. DREZE, Jacques H. & MODIGLIANI, Franco, . "Cosumption decisions under uncertainty," CORE Discussion Papers RP -119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  25. Hartog, Joop & Vijverberg, Wim P., 2002. "Do Wages Really Compensate for Risk Aversion and Skewness Affection?," IZA Discussion Papers 426, Institute for the Study of Labor (IZA).
  26. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
  27. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  28. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  29. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
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