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Reconsidering Risk Aversion

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  • Daniel J. Benjamin
  • Mark Alan Fontana
  • Miles S. Kimball

Abstract

Risk aversion is typically inferred from real or hypothetical choices over risky lotteries, but such “untutored” choices may reflect mistakes rather than preferences. We develop a procedure to obtain a better measure of normatively relevant preferences: after eliciting untutored choices, we confront participants with their choices that are inconsistent with intertemporal-expected-utility axioms and allow them to reconsider their choices. We demonstrate this procedure via a survey about hypothetical retirement investment choices administered to 596 Cornell students. We find that, on average, reconsidered choices are more consistent with almost all axioms, with one exception related to a counterfactual reference point.

Suggested Citation

  • Daniel J. Benjamin & Mark Alan Fontana & Miles S. Kimball, 2020. "Reconsidering Risk Aversion," NBER Working Papers 28007, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28007
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    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H8 - Public Economics - - Miscellaneous Issues

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