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Subjective Measures of Risk Aversion, Fixed Costs, and Portfolio Choice

  • Arie Kapteyn
  • Federica Teppa

The paper investigates risk attitudes among different types of individuals. We 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 and Calvo-Pardo (2002), we 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 we incorporate the measured risk attitudes into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical” measure. We provide a discussion of the reasons for this finding. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.          ÂÂÂ

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 216.

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Date of creation: Jul 2009
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Handle: RePEc:dnb:dnbwpp:216
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