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Asset Integration and Attitudes to Risk: Theory and Evidence

Author

Listed:
  • Steffen Andersen

    () (Copenhagen Business School)

  • James C. Cox

    (Robinson College of Business, Georgia State University)

  • Glenn W. Harrison

    () (Robinson College of Business, Georgia State University)

  • Morten Lau

    () (Durham Business School)

  • Elisabet E. Rutstroem

    () (Robinson College of Business, Georgia State University)

  • Vjollca Sadiraj

    (Robinson College of Business, Georgia State University)

Abstract

Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiments is consistent with partial asset integration: they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings.

Suggested Citation

  • Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem & Vjollca Sadiraj, 2011. "Asset Integration and Attitudes to Risk: Theory and Evidence," Working Papers 2011_10, Durham University Business School.
  • Handle: RePEc:dur:durham:2011_10
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    References listed on IDEAS

    as
    1. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten I. & Rutström, E. Elisabet, 2014. "Discounting behavior: A reconsideration," European Economic Review, Elsevier, vol. 71(C), pages 15-33.
    2. J. Hirshleifer, 1966. "Investment Decision Under Uncertainty: Applications of the State-Preference Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 80(2), pages 252-277.
    3. Cox, James C. & Sadiraj, Vjollca, 2006. "Small- and large-stakes risk aversion: Implications of concavity calibration for decision theory," Games and Economic Behavior, Elsevier, vol. 56(1), pages 45-60, July.
    4. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, May.
    5. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
    6. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    7. James C. Cox & Vjollca Sadiraj, 2008. "Risky Decisions in the Large and in the Small: Theory and Experiment," Experimental Economics Center Working Paper Series 2008-01, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    8. Vjollca Sadiraj, 2014. "Probabilistic risk attitudes and local risk aversion: a paradox," Theory and Decision, Springer, vol. 77(4), pages 443-454, December.
    9. Wilcox, Nathaniel T., 2011. "'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk," Journal of Econometrics, Elsevier, vol. 162(1), pages 89-104, May.
    10. James Cox & Vjollca Sadiraj & Ulrich Schmidt, 2015. "Paradoxes and mechanisms for choice under risk," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 215-250, June.
    11. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    12. Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, March.
    13. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    14. Steffen Andersen & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem, 2011. "Intertemporal Utility and Correlation Aversion," Working Papers 2011_03, Durham University Business School.
    15. James Cox & Vjollca Sadiraj & Bodo Vogt & Utteeyo Dasgupta, 2013. "Is there a plausible theory for decision under risk? A dual calibration critique," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(2), pages 305-333, October.
    16. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
    17. William Neilson, 2001. "Calibration results for rank-dependent expected utility," Economics Bulletin, AccessEcon, vol. 4(10), pages 1-5.
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    1. repec:spr:agfoec:v:5:y:2017:i:1:d:10.1186_s40100-017-0078-9 is not listed on IDEAS
    2. Lionel Page & David Savage & Benno Torgler, 2012. "Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster," NCER Working Paper Series 83, National Centre for Econometric Research, revised 09 Jul 2012.
    3. Fafchamps, Marcel & Kebede, Bereket & Zizzo, Daniel John, 2015. "Keep up with the winners: Experimental evidence on risk taking, asset integration, and peer effects," European Economic Review, Elsevier, vol. 79(C), pages 59-79.
    4. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten I. & Rutström, E. Elisabet, 2014. "Discounting behavior: A reconsideration," European Economic Review, Elsevier, vol. 71(C), pages 15-33.
    5. Page, Lionel & Savage, David A. & Torgler, Benno, 2014. "Variation in risk seeking behaviour following large losses: A natural experiment," European Economic Review, Elsevier, vol. 71(C), pages 121-131.
    6. Falco, Paolo, 2014. "Does risk matter for occupational choices? Experimental evidence from an African labour market," Labour Economics, Elsevier, vol. 28(C), pages 96-109.
    7. Nejat Anbarci & Nick Feltovich, 2013. "How responsive are people to changes in their bargaining position? Earned bargaining power and the 50–50 norm," EcoMod2013 5855, EcoMod.
    8. Falco, Paolo, 2014. "Does risk matter for occupational choices? Experimental evidence from an African labour market," Labour Economics, Elsevier, vol. 28(C), pages 96-109.

    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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