Estimating Risk Attitudes Using Lotteries: A Large Sample Approach
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM); Tinbergen Institute
Arthur Van Soest
RAND Corporation; Netspar; Tilburg University; Institute for the Study of Labor (IZA)
Tilburg University - Center for Economic Research (CentER)
Tilburg University, CentER Discussion Paper Series No. 1999-12
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 decision 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.
JEL Classification: D81, D82working papers series
Date posted: September 27, 1999
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.375 seconds