Risk Aversion in a Dynamic Asset Allocation Experiment

40 Pages Posted: 23 Jan 2015

See all articles by Isabelle Brocas

Isabelle Brocas

University of Southern California - Department of Economics

Juan D. Carrillo

University of Southern California - Department of Economics; Centre for Economic Policy Research (CEPR)

Aleksandar Giga

University of Southern California

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: January 2015

Abstract

We conduct a controlled laboratory experiment where subjects dynamically choose their portfolio allocation between a safe and a risky asset. We first derive analytically the optimal allocation of an expected utility maximizer with HARA utility function. We then fit the experimental choices to this model to assess the risk attitude of our subjects. Despite the substantial heterogeneity across subjects, decreasing absolute risk aversion and increasing relative risk aversion are the most prevalent risk types, and we can classify more than 50% of the subjects in this combined category. We also find evidence of increased risk taking after a gain but the effect is small in magnitude. Overall, our robustness tests show that the behavior of subjects is generally well accounted for by the HARA expected utility model. Finally, the analysis at the session level suggests that the behavior of the representative agent is less heterogeneous and closer to (though statistically different from) constant relative risk aversion.

Keywords: CRRA, HARA, laboratory experiments, portfolio allocation, risk aversion

JEL Classification: C91, D03, D81, G11

Suggested Citation

Brocas, Isabelle and Carrillo, Juan D. and Giga, Aleksandar and Zapatero, Fernando, Risk Aversion in a Dynamic Asset Allocation Experiment (January 2015). CEPR Discussion Paper No. DP10332, Available at SSRN: https://ssrn.com/abstract=2554406

Isabelle Brocas (Contact Author)

University of Southern California - Department of Economics ( email )

3022 S. Vermont Ave
Los Angeles, CA 90089
United States
213-740-8842 (Phone)
213-740-8543 (Fax)

HOME PAGE: http://www-rcf.usc.edu/~brocas/

Juan D. Carrillo

University of Southern California - Department of Economics ( email )

3022 S. Vermont Ave.
Los Angeles, CA 90089
United States
213-740-3526 (Phone)
213-740-8543 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aleksandar Giga

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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