TY - JOUR
T1 - Subjective measures of risk aversion, fixed costs, and portfolio choice
AU - Kapteyn, A.
AU - Teppa, F.
N1 - Appeared earlier as CentER Discussion Paper 2002-011
PY - 2011
Y1 - 2011
N2 - The paper investigates risk preferences among different types of individuals. We use several different measures of risk preferences, including questions on choices between uncertain income streams suggested by Barsky, Juster, Kimball, and Shapiro (1997) and a number of ad hoc measures. As in Barsky et al. (1997) and Arrondel and Calvo-Pardo (2002), we first analyze individual variation in the risk aversion measures and explain them by background characteristics (both “objective” characteristics and other subjective measures of risk preference). Next we incorporate the measured risk preferences into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical” measure, suggesting that sophisticated measures based on economic theory may exceed the financial capability of respondents. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.
AB - The paper investigates risk preferences among different types of individuals. We use several different measures of risk preferences, including questions on choices between uncertain income streams suggested by Barsky, Juster, Kimball, and Shapiro (1997) and a number of ad hoc measures. As in Barsky et al. (1997) and Arrondel and Calvo-Pardo (2002), we first analyze individual variation in the risk aversion measures and explain them by background characteristics (both “objective” characteristics and other subjective measures of risk preference). Next we incorporate the measured risk preferences into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical” measure, suggesting that sophisticated measures based on economic theory may exceed the financial capability of respondents. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.
U2 - 10.1016/j.joep.2011.04.002
DO - 10.1016/j.joep.2011.04.002
M3 - Article
SN - 0167-4870
VL - 32
SP - 564
EP - 580
JO - Journal of Economic Psychology
JF - Journal of Economic Psychology
IS - 4
ER -