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Discrete choice estimation of risk aversion

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Abstract

We analyze the use of discrete choice models for the estimation of risk aversion and show a fundamental flaw in the standard random utility model which is commonly used in the literature. Specifically, we find that given two gambles, the probability of selecting the riskier gamble may be larger for larger levels of risk aversion. We characterize when this occurs. By contrast, we show that the alternative random preference approach is free of such problems.

Suggested Citation

  • Jose Apesteguia & Miguel A. Ballester, 2014. "Discrete choice estimation of risk aversion," Economics Working Papers 1443, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1443
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    Cited by:

    1. Liang Chen & Eugene Choo & Alfred Galichon & Simon Weber, 2023. "Existence of a Competitive Equilibrium with Substitutes, with Applications to Matching and Discrete Choice Models," Papers 2309.11416, arXiv.org.
    2. Odran Bonnet & Alfred Galichon & Yu-Wei Hsieh & Keith O’Hara & Matt Shum, 2022. "Yogurts Choose Consumers? Estimation of Random-Utility Models via Two-Sided Matching [Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," Review of Economic Studies, Oxford University Press, vol. 89(6), pages 3085-3114.
    3. Ranoua Bouchouicha & Ferdinand M. Vieider, 2017. "Accommodating stake effects under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 1-28, August.
    4. Jose Apesteguia & Miguel A. Ballester, 2014. "Discrete choice estimation of time preferences," Economics Working Papers 1442, Department of Economics and Business, Universitat Pompeu Fabra.

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    More about this item

    Keywords

    Discrete Choice; Structural Estimation; Risk Aversion; Random Utility Models; Random Preference Models.;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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