The Role of Risk Aversion in Predicting Individual Behaviors

39 Pages Posted: 21 Oct 2004

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Monica Paiella

University of Naples Federico II

Date Written: September 2004

Abstract

We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory should vary with attitude towards risk. We find that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.

Keywords: Risk aversion, heterogenous preferences, individual choice

JEL Classification: D10, D80

Suggested Citation

Guiso, Luigi and Paiella, Monica, The Role of Risk Aversion in Predicting Individual Behaviors (September 2004). Available at SSRN: https://ssrn.com/abstract=608262

Luigi Guiso (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Monica Paiella

University of Naples Federico II ( email )

Via Amm. F. Acton, 38
80133 Naples, Caserta 80133
Italy

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