Eliciting risk preferences and elasticity of substitution
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Accepted author manuscript, 168 KB, PDF document
Risk aversion and elasticity of intertemporal substitution (EIS) are separated via the celebrated recursive utility building on certainty equivalents of indirect utility. Based on an alternative separation method, we formulate a questionnaire for simultaneous and consistent estimation of risk aversion, subjective discount rate, and EIS. From a representative group of 1,153 respondents, we estimate parameters for these preferences and their variability within the population. Risk aversion and the subjective discount rate are found to be in the orders of 2 and 0, respectively, not diverging far away from results from other studies. Our estimate of EIS in the order of 10 is larger than often reported. Background variables like age and income have little predictive power for the three estimates. Only gender has a significant influence on risk aversion in the usually perceived direction that females are more risk-averse than males. Using individual estimates of preference parameters, we find covariance between preferences toward risk and EIS. We present the background reasoning on objectives, the questionnaire, a statistical analysis of the results, and economic interpretations of these, including relations to the literature. Funding: The authors gratefully thank the company Ipsos for funding this survey.
Original language | English |
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Journal | Decision Analysis |
Volume | 17 |
Issue number | 4 |
Pages (from-to) | 314-329 |
ISSN | 1545-8490 |
DOIs | |
Publication status | Published - 2020 |
- Certainty equivalents, Constant equivalents, Nonrecursive separation, Questionnaire, Subjective discounting
Research areas
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