IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp6877.html
   My bibliography  Save this paper

An Alternative Explanation for the Variation in Reported Estimates of Risk Aversion

Author

Listed:
  • Conniffe, Denis

    (National University of Ireland, Maynooth)

  • O'Neill, Donal

    (National University of Ireland, Maynooth)

Abstract

There is a large literature estimating Arrow-Pratt coefficients of absolute and relative risk aversion. A striking feature of this literature is the very wide variation in the reported estimates of the coefficients. While there are often legitimate reasons for these differences in the estimates, there is another source of variation that has not been considered to date. The Arrow-Pratt coefficients are properties of the utility functions, but a number of estimates are obtained by equating these to risk aversion measures defined in a mean-variance framework. This paper shows that while the legitimacy of the mean-variance approach may hold under general conditions the additional assumptions invoked when estimating the risk aversion parameter hold only in very restricted circumstances and that serious under or over estimation can easily arise as a result.

Suggested Citation

  • Conniffe, Denis & O'Neill, Donal, 2012. "An Alternative Explanation for the Variation in Reported Estimates of Risk Aversion," IZA Discussion Papers 6877, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp6877
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp6877.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. M. S. Feldstein, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(1), pages 5-12.
    2. Salem, A B Z & Mount, T D, 1974. "A Convenient Descriptive Model of Income Distribution: The Gamma Density," Econometrica, Econometric Society, vol. 42(6), pages 1115-1127, November.
    3. Engel, Charles & Rodrigues, Anthony P, 1989. "Tests of International CAPM with Time-Varying Covariances," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 119-138, April-Jun.
    4. Paul A. Samuelson, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances and Higher Moments," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(4), pages 537-542.
    5. Hawawini, Gabriel, 1978. "A mean-standard deviation exposition of the theory of the firm under uncertainty," MPRA Paper 10148, University Library of Munich, Germany.
    6. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1109-1150, December.
    7. Joop Hartog & Ada Ferrer‐i‐Carbonell & Nicole Jonker, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
    8. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
    9. 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.
    10. Thomas J. Flavin, 2006. "How Risk Averse are Fund Managers? Evidence from Irish Mutual Funds," Economics Department Working Paper Series n1630206, Department of Economics, National University of Ireland - Maynooth.
    11. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
    12. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 537-579.
    13. Donald Meyer & Jack Meyer, 2005. "Relative Risk Aversion: What Do We Know?," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 243-262, December.
    14. Kurt W. Rotthoff, 2011. "How Market Makers Affect Efficiency: Evidence that Markets are Becoming Less Efficient," Capital Markets Review, Malaysian Finance Association, vol. 19(1&2), pages 53-72.
    15. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    16. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-317, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Neustroev, Dmitry, 2013. "The Uzawa-Lucas Growth Model with Natural Resources," MPRA Paper 52937, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. Francois Outreville, 2014. "Risk Aversion, Risk Behavior, and Demand for Insurance: A Survey," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 37(2), pages 158-186.
    2. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2018. "Time varying risk aversion," Journal of Financial Economics, Elsevier, vol. 128(3), pages 403-421.
    3. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    4. J. François Outreville, 2015. "The Relationship Between Relative Risk Aversion And The Level Of Education: A Survey And Implications For The Demand For Life Insurance," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 97-111, February.
    5. Alessandro Bucciol & Raffaele Miniaci, 2011. "Household Portfolios and Implicit Risk Preference," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1235-1250, November.
    6. Insoo Cho & Peter F. Orazem & Tanya Rosenblat, 2018. "Are Risk Attitudes Fixed Factors or Fleeting Feelings?," Journal of Labor Research, Springer, vol. 39(2), pages 127-149, June.
    7. Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, vol. 68(1), pages 115-148, February.
    8. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Juergen Schupp & Gert Wagner, 2005. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," Working Papers 2096, The Field Experiments Website.
    9. Bigman, David, 1995. "Approximation methods for ranking risky investment alternatives," Agricultural Economics, Blackwell, vol. 12(1), pages 1-9, April.
    10. Booij, Adam S. & van de Kuilen, Gijs, 2009. "A parameter-free analysis of the utility of money for the general population under prospect theory," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 651-666, August.
    11. repec:dau:papers:123456789/2324 is not listed on IDEAS
    12. Booij, Adam S. & van Praag, Bernard M.S., 2009. "A simultaneous approach to the estimation of risk aversion and the subjective time discount rate," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 374-388, May.
    13. Fang, Guanfu & Li, Wei & Zhu, Ying, 2022. "The shadow of the epidemic: Long-term impacts of meningitis exposure on risk preference and behaviors," World Development, Elsevier, vol. 157(C).
    14. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    15. A. Rashad Abdel-Khalik, 2014. "CEO Risk Preference and Investing in R&D," Abacus, Accounting Foundation, University of Sydney, vol. 50(3), pages 245-278, September.
    16. Nolan Miller & Alexander Wagner & Richard Zeckhauser, 2013. "Solomonic separation: Risk decisions as productivity indicators," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 265-297, June.
    17. Selima Ben Mansour & Elyès Jouini & Jean-Michel Marin & Clotilde Napp & Christian Robert, 2008. "Are risk-averse agents more optimistic? A Bayesian estimation approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(6), pages 843-860.
    18. Sasaki, Shunichiro & Xie, Shiyu & Ohtake, Fumio & Qin, Jie & Tsutsui, Yoshiro, 2008. "Experiments on risk attitude: The case of Chinese students," China Economic Review, Elsevier, vol. 19(2), pages 245-259, June.
    19. Peter Phillips, 2011. "Terrorists’ Equilibrium Choices When No Attack Method is Riskless," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 39(2), pages 129-141, June.
    20. Li, Chenguang & Sexton, Richard J., 2009. "Impacts of Retailers’ Pricing Strategies for Produce Commodities on Farmer Welfare," 2009 Conference, August 16-22, 2009, Beijing, China 51720, International Association of Agricultural Economists.
    21. Goytom Abraha Kahsay & Daniel Osberghaus, 2018. "Storm Damage and Risk Preferences: Panel Evidence from Germany," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(1), pages 301-318, September.

    More about this item

    Keywords

    location scale; mean-variance estimation; variability in risk aversion estimation;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp6877. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.