Estimating Risk Preferences in the Presence of Bifurcated Wealth Dynamics: Do We Misattribute Dynamic Risk Responses to Static Risk Aversion?

20 Pages Posted: 18 May 2011

See all articles by Travis J. Lybbert

Travis J. Lybbert

University of California, Davis - Department of Agricultural and Resource Economics

David R. Just

Cornell University - Dyson School of Applied Economics and Management

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Date Written: October 1, 2010

Abstract

Estimating risk preferences is tricky because controlling for confounding factors is difficult. Omitting or imperfectly controlling for these factors can attribute too much observable behavior to risk aversion and bias estimated preferences. Agents often modify risky decisions in response to dynamic wealth or asset thresholds, where they exist. Ignoring this dynamic risk response introduces an attribution bias in static estimates of risk aversion. We demonstrate this pitfall using a simple model and a Monte Carlo simulation to explore the implications of this problem for empirical estimation. Joint estimation of risk preferences and wealth dynamics may remedy the problem, but can be empirically challenging.

Keywords: Risk, uncertainty, wealth dynamics, risk aversion, risk preference estimation, poverty

JEL Classification: D81, O12, D90

Suggested Citation

Lybbert, Travis J. and Just, David R. and Barrett, Christopher B., Estimating Risk Preferences in the Presence of Bifurcated Wealth Dynamics: Do We Misattribute Dynamic Risk Responses to Static Risk Aversion? (October 1, 2010). Available at SSRN: https://ssrn.com/abstract=1844719 or http://dx.doi.org/10.2139/ssrn.1844719

Travis J. Lybbert

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States

David R. Just

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States
607-255-2086 (Phone)
607-255-9984 (Fax)

Christopher B. Barrett (Contact Author)

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

315 Warren Hall
Ithaca, NY 14853-7801
United States
607-255-4489 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://aem.cornell.edu/faculty_sites/cbb2/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
568
PlumX Metrics