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Estimating Risk Attitudes Using Lotteries; A Large Sample Approach

Author

Listed:
  • Donkers, A.C.D.
  • Melenberg, B.

    (Tilburg University, Center For Economic Research)

  • van Soest, A.H.O.

    (Tilburg University, Center For Economic Research)

Abstract

Attitudes towards risk play a major role in many economic decisions. In empirical studies one quite often assumes that attitudes towards risk do not vary across individuals. This papers questions this assumption and analyses which factors influence an individual's risk attitude. Based on questions on lotteries in a large household survey we semiparametrically estimate an index for risk aversion. We only make weak assumptions about the underlying deci- sion process, and our estimation method allows for generalisations of expected utility. We find strong links between risk aversion and gender, education level, and income of the individual. We also estimate a structural model based on Cumulative Prospect Theory and find that the value function depends on an index that is very similar to the index of risk aversion. Expected utility is strongly rejected and the probability weighting function varies significantly with gender, age, and income of the individual.

Suggested Citation

  • Donkers, A.C.D. & Melenberg, B. & van Soest, A.H.O., 1999. "Estimating Risk Attitudes Using Lotteries; A Large Sample Approach," Discussion Paper 1999-12, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:94cd10d5-d110-4d60-87f2-086013112b71
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