Relative Risk Aversion: Empirical Estimates
What would you favor:
- Choice A: Flip a coin with the place if it lands heads you win $20 but when it lands on tails you get $0
- Choice B: Win $10 for sure
In case you choose choice A, you might be threat loving; for those who choose choice B you might be threat averse. If you’re detached between these selections you might be threat impartial. A key query is, what share of people have these preferences and the way robust are these preferences. As an illustration, a threat impartial individual could choose Choice B up till the understanding equal was $8, then they might swap to Choice A. A very threat averse individual could choose Choice B till it was lowered to $5, and solely then choose Choice A.
One technique to measure the energy of those preferences is with a metric often known as relative threat aversion.
A paper by Outreville (2014) supplies an outline of some papers than intention to estimate relative threat aversion empirically. We discover a variety of RRA estimates.
We see that sure methodologies produce increased relative threat aversion estimates than others. Information collected from surveys and sport exhibits produced related estimates of threat aversion; estimates of relative threat aversion primarily based on monetary selections and insurance coverage purchases present a lot increased ranges of threat aversion.
The paper supplies extra element on how relative threat aversion varies throughout completely different particular person traits (e.g., schooling, wealth, gender) and is price a learn.
- Outreville JF. Threat aversion, threat conduct, and demand for insurance coverage: A survey. Journal of Insurance coverage Points. 2014 Oct 1:158-86.
