An Improved Measure of Risk Aversion

Abstract

This study investigates financial risk aversion using an improved measure based on income gambles and rigorously related to optimal portfolio choices. The new measure modifies a previous measure by adding graphical presentations to clarify the impact of different income choices. We compared the measure’s responses to those of previous non-graphical versions. To enable comparisons to an established risk measure, we also asked the Survey of Consumer Finances (SCF) risk tolerance question. Based on responses from 152 students, there is a significant correlation between relative risk aversion estimates based on the new measure and the SCF question.

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