DP4591 The Role of Risk Aversion in Predicting Individual Behaviours

Author(s): Luigi Guiso, Monica Paiella
Publication Date: September 2004
Keyword(s): heterogenous preferences, individual choice, risk aversion
JEL(s): D10, D80
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4591

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.