Eliciting risk preferences and elasticity of substitution

Research output: Contribution to journalJournal articleResearchpeer-review

Documents

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 languageEnglish
JournalDecision Analysis
Volume17
Issue number4
Pages (from-to)314-329
ISSN1545-8490
DOIs
Publication statusPublished - 2020

    Research areas

  • Certainty equivalents, Constant equivalents, Nonrecursive separation, Questionnaire, Subjective discounting

Number of downloads are based on statistics from Google Scholar and www.ku.dk


No data available

ID: 255112664