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Household Portfolios and Implicit Risk Aversion

  • Alessandro Bucciol
  • Raffaele Miniaci

We derive from a sample of US households the distribution of the risk aversion implicit in their portfolio choice. Our estimate minimizes the distance between the certainty equivalent return generated with observed portfolios and portfolios that are optimal in a mean-variance framework. Taking into account real wealth and constraints in portfolio composition, we obtain a median risk aversion coefficient of 2.7 and observe substantial heterogeneity across individuals. Our analysis informs that risk aversion reduces with wealth and education, and increases with age. Disregarding real wealth and constraints, our estimates are markedly larger and the direction of the above correlations differs. The inferred optimization bias is small, especially with over-simplified portfolios.

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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number 0808.

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Date of creation: 2008
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Handle: RePEc:ubs:wpaper:0808
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  1. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  2. Armin Falk & David Huffman & Gert Wagner & Jurgen Schupp & Thomas Dohmen & Uwe Sunde, 2005. "Individual risk attitudes: New evidence from a large, representative, experimentally-validated survey," Framed Field Experiments 00140, The Field Experiments Website.
  3. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
  4. Cohn, Richard A, et al, 1975. "Individual Investor Risk Aversion and Investment Portfolio Composition," Journal of Finance, American Finance Association, vol. 30(2), pages 605-20, May.
  5. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
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