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Asset integration and attitudes to risk : theory and evidence.

Andersen, Steffen and Cox, James and Harrison, Glenn and Lau, Morten and Rutstroem, Elisabet and Sadiraj, Vjollca (2011) 'Asset integration and attitudes to risk : theory and evidence.', Working Paper. Durham University, Durham.

Abstract

Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiments is consistent with partial asset integration: they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings.

Item Type:Monograph (Working Paper)
Full text:PDF - Published Version (469Kb)
Status:Not peer-reviewed
Publisher Web site:http://www.dur.ac.uk/business/faculty/working-papers/
Record Created:07 Dec 2012 10:36
Last Modified:16 Oct 2013 13:24

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