Pure Rank Preferences and Variation in Risk-Taking Behavior

11 Pages Posted: 14 Oct 2019

See all articles by Oded Stark

Oded Stark

University of Bonn; University of Warsaw; University of Tuebingen; Georgetown University

Wiktor Budzinski

University of Warsaw

Marcin Jakubek

Polish Academy of Sciences - Institute of Economics (INE PAN)

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Abstract

Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual’s risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

Keywords: rank in the wealth distribution, rank-based utility, variation in risk-taking behavior, relative risk aversion

JEL Classification: D01, D31, D81, G32, G41

Suggested Citation

Stark, Oded and Budzinski, Wiktor and Jakubek, Marcin, Pure Rank Preferences and Variation in Risk-Taking Behavior. IZA Discussion Paper No. 12637. Available at SSRN: https://ssrn.com/abstract=3468585

Oded Stark (Contact Author)

University of Bonn ( email )

Walter-Flex-Str. 3
Bonn, NRW 53113
Germany

University of Warsaw ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

University of Tuebingen

Wilhelmstr. 19
Tuebingen, Baden Wuerttemberg 72074
Germany

Georgetown University ( email )

Washington, DC 20057
United States

Wiktor Budzinski

University of Warsaw ( email )

Krakowskie Przedmiescie 26/28
Warszawa, Pl-00681
Poland

Marcin Jakubek

Polish Academy of Sciences - Institute of Economics (INE PAN) ( email )

Palace of Culture and Science
Pl. Defilad 1
Warsaw, 00-901
Poland

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