Is Risk Aversion Really Correlated with Wealth? How Estimated Probabilities Introduce Spurious Correlation

16 Pages Posted: 24 Apr 2020

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

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Date Written: November 2007

Abstract

Economists frequently focus on correlations between wealth and risk preferences but rarely observe the probabilities needed to test this relationship empirically. These unobserved probabilities are typically estimated via profit or production functions conditioned on wealth correlates, which may leave statistical fingerprints on subsequently‐estimated risk aversion coefficients and confound correlations between wealth and risk preferences. Using data from an experiment with observable probabilities, we compare risk aversion coefficients based on true probabilities with those based on probabilities estimated using standard approaches and show how estimated probabilities can change risk aversion coefficients substantially and introduce spurious correlation between risk aversion and wealth.

Keywords: decreasing absolute risk aversion, expected utility, experimental economics, risk aversion, wealth

Suggested Citation

Lybbert, Travis J. and Just, David R., Is Risk Aversion Really Correlated with Wealth? How Estimated Probabilities Introduce Spurious Correlation (November 2007). American Journal of Agricultural Economics, Vol. 89, Issue 4, pp. 964-979, 2007, Available at SSRN: https://ssrn.com/abstract=3583785 or http://dx.doi.org/10.1111/j.1467-8276.2007.01034.x

Travis J. Lybbert (Contact Author)

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)

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