Subjective Measures of Risk Aversion and Portfolio Choice

Abstract

The paper investigates risk attitudes among different types of individuals. The authors use several different measures of risk attitudes, including questions on choices between uncertain income streams suggested by Barsky et al. (1997) and a number of ad hoc measures. As in Barsky et al. (1997) and Arrondel (2002), the authors first analyse individual variation in the risk aversion measures and explain them by background characteristics (both "objective" characteristics and other subjective measures of risk preference). Next, the authors incorporate the measured risk attitudes into a household partfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios. The authors results show that the Barsky et al. (1997) measure has little explanatory power, whereas ad hoc measures do a considerably better job. The authors provide a discussion of the reasons for this finding.

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