Estimating Risk Attitudes Using Lotteries; A Large Sample Approach

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Abstract

Attitudes towards risk play a major role in many economic decisions. In empirical studies one quite often assumes that attitudes towards risk do not vary across individuals. This papers questions this assumption and analyses which factors influence an individual's risk attitude. Based on questions on lotteries in a large household survey we semiparametrically estimate an index for risk aversion. We only make weak assumptions about the underlying deci- sion process, and our estimation method allows for generalisations of expected utility. We find strong links between risk aversion and gender, education level, and income of the individual. We also estimate a structural model based on Cumulative Prospect Theory and find that the value function depends on an index that is very similar to the index of risk aversion. Expected utility is strongly rejected and the probability weighting function varies significantly with gender, age, and income of the individual.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages39
Volume1999-12
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper
Volume1999-12

Fingerprint

Lottery
Risk attitude
Risk aversion
Expected utility
Income
Influence factors
Empirical study
Household survey
Cumulative prospect theory
Structural model
Probability weighting function
Education
Individual risk
Economics
Value function

Keywords

  • Risk aversion
  • non-expected utility
  • semiparametric estimation

Cite this

Donkers, A. C. D., Melenberg, B., & van Soest, A. H. O. (1999). Estimating Risk Attitudes Using Lotteries; A Large Sample Approach. (CentER Discussion Paper; Vol. 1999-12). Tilburg: Econometrics.
Donkers, A.C.D. ; Melenberg, B. ; van Soest, A.H.O. / Estimating Risk Attitudes Using Lotteries; A Large Sample Approach. Tilburg : Econometrics, 1999. (CentER Discussion Paper).
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year = "1999",
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Donkers, ACD, Melenberg, B & van Soest, AHO 1999 'Estimating Risk Attitudes Using Lotteries; A Large Sample Approach' CentER Discussion Paper, vol. 1999-12, Econometrics, Tilburg.

Estimating Risk Attitudes Using Lotteries; A Large Sample Approach. / Donkers, A.C.D.; Melenberg, B.; van Soest, A.H.O.

Tilburg : Econometrics, 1999. (CentER Discussion Paper; Vol. 1999-12).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Estimating Risk Attitudes Using Lotteries; A Large Sample Approach

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AU - Melenberg, B.

AU - van Soest, A.H.O.

N1 - Pagination: 39

PY - 1999

Y1 - 1999

N2 - Attitudes towards risk play a major role in many economic decisions. In empirical studies one quite often assumes that attitudes towards risk do not vary across individuals. This papers questions this assumption and analyses which factors influence an individual's risk attitude. Based on questions on lotteries in a large household survey we semiparametrically estimate an index for risk aversion. We only make weak assumptions about the underlying deci- sion process, and our estimation method allows for generalisations of expected utility. We find strong links between risk aversion and gender, education level, and income of the individual. We also estimate a structural model based on Cumulative Prospect Theory and find that the value function depends on an index that is very similar to the index of risk aversion. Expected utility is strongly rejected and the probability weighting function varies significantly with gender, age, and income of the individual.

AB - Attitudes towards risk play a major role in many economic decisions. In empirical studies one quite often assumes that attitudes towards risk do not vary across individuals. This papers questions this assumption and analyses which factors influence an individual's risk attitude. Based on questions on lotteries in a large household survey we semiparametrically estimate an index for risk aversion. We only make weak assumptions about the underlying deci- sion process, and our estimation method allows for generalisations of expected utility. We find strong links between risk aversion and gender, education level, and income of the individual. We also estimate a structural model based on Cumulative Prospect Theory and find that the value function depends on an index that is very similar to the index of risk aversion. Expected utility is strongly rejected and the probability weighting function varies significantly with gender, age, and income of the individual.

KW - Risk aversion

KW - non-expected utility

KW - semiparametric estimation

M3 - Discussion paper

VL - 1999-12

T3 - CentER Discussion Paper

BT - Estimating Risk Attitudes Using Lotteries; A Large Sample Approach

PB - Econometrics

CY - Tilburg

ER -

Donkers ACD, Melenberg B, van Soest AHO. Estimating Risk Attitudes Using Lotteries; A Large Sample Approach. Tilburg: Econometrics. 1999. (CentER Discussion Paper).