This paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects’ homes. Using a question asking people about their willingness to take risks \"in general\", we find that gender, age, height, and parental background have an economically significant impact on willingness to take risks. The experiment confirms the behavioral validity of this measure, using paid lottery choices. Turning to other questions about risk attitudes in specific contexts, we find similar results on the determinants of risk attitudes, and also shed light on the deeper question of stability of risk attitudes across contexts. We conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks, occupational choice, and smoking. The question about risk taking in general generates the best all-round predictor of risky behavior.

/pdf/individual-risk-attitudes-measurement-determinants-and-2j4cjvjdkm.pdf

Individual Risk Attitudes: Measurement, Determinants and Behavioral Consequences

Foundations Of Statistics

This paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects’ homes. Using a question asking people about their willingness to take risks “in general”, we find that gender, age, height, and parental background have an economically significant impacton willingness to take risks. The experiment confirms the behavioral validity of this measure, using paid lottery choices. Turning to other question about risk attitudes in specific contexts, we find similar results on the determinants of risk attitudes, and also shed light on the deeper question of stability of risk attitudes across contexts. We conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks, occupational choice, and smoking. The question about risk taking in general generates the best all-around predictor of risky behavior

Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data

Is the way that people make risky choices, or tradeoffs over time, related to cognitive ability? This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of the population and incentive compatible measures. We conduct choice experiments measuring risk aversion, and impatience over an annual time horizon, for a randomly drawn sample of roughly 1,000 German adults. Subjects also take part in two different tests of cognitive ability, which correspond to sub-modules of one of the most widely used IQ tests. Interviews are conducted in subjects' own homes. We find that lower cognitive ability is associated with greater risk aversion, and more pronounced impatience. These relationships are significant, and robust to controlling for personal characteristics, educational attainment, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.

/pdf/are-risk-aversion-and-impatience-related-to-cognitive-3n71ze8tmw.pdf

Are risk aversion and impatience related to cognitive ability

It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture regression model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two distinct types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from linear probability weighting, consistent with prospect theory. 20% of the subjects weight probabilities near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.

/pdf/risk-and-rationality-uncovering-heterogeneity-in-probability-4fuvb1bxdq.pdf

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

It has long been recognized that there is considerable heterogeneity in individual risk taking behavior, but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two major types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from linear probability weighting of varying strength, consistent with prospect theory. Twenty percent of the subjects weight probabilities near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.

/pdf/risk-and-rationality-uncovering-heterogeneity-in-probability-346bgdnkww.pdf

A large body of evidence has documented that risk preferences depend nonlinearly on outcome probabilities. We discuss the foundations and economic consequences of probability-dependent risk preferences and offer a practitioner's guide to understanding and modeling probability dependence. We argue that probability dependence provides a unifying framework for explaining many real-world phenomena, such as the equity premium puzzle, the long-shot bias in betting markets, and households' underdiversification and their willingness to buy small-scale insurance at exorbitant prices. Recent findings indicate that probability dependence is not just a feature of laboratory data, but is indeed manifest in financial, insurance, and betting markets. The neglect of probability dependence may prevent researchers from understanding and predicting important phenomena.

https://www.annualreviews.org/doi/suppl/10.1146/annurev-economics-080511-110950/suppl_file/EC-04-FehrDuda-SupApp.pdf

Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that the increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. Contrary to gains, no coherent change in relative risk aversion is observed for losses. These results not only challenge expected utility theory, but also prospect theory.

/pdf/rationality-on-the-rise-why-relative-risk-aversion-increases-24zf4aq9wo.pdf

Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that the observed increase in relative risk aversion over gains cannot be captured by the curvature of the value function. Rather, it is predominantly driven by a change in probability weighting of a majority group of individuals who weight probabilities of high gains more conservatively. Contrary to gains, no coherent change in relative risk aversion is observed for losses. These results not only challenge expected utility theory, but also prospect theory.

/pdf/rationality-on-the-rise-why-relative-risk-aversion-increases-3woqfs163z.pdf

Thomas Epper

Papers

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences

Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size

Rationality on the rise: Why relative risk aversion increases with stake size