Working Paper: CEPR ID: DP4591
Authors: Luigi Guiso; Monica Paiella
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: heterogeneous preferences; individual choice; risk aversion
JEL Codes: D10; D80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Risk Aversion (D81) | Probability of being self-employed (J23) |
| Risk Aversion (D81) | Likelihood of choosing risky occupations (J28) |
| Risk Aversion (D81) | Likelihood of holding risky assets (G11) |
| Risk Aversion (D81) | Years invested in education (I26) |
| Risk Aversion (D81) | Probability of migrating or changing jobs (J62) |
| Risk Aversion (D81) | Self-selection into safer occupations (J28) |