Subjective measures of household preferences and financial decisions

In intertemporal models of household consumption or portfolio choice, household behaviour depends on, for example, the household's rate of time preference, the rate of risk aversion, and the household's information set. In this paper we use a survey of Dutch households which contains direct subjective information on risk aversion and time preference and on interest in financial matters. We first describe these data and analyze how they relate to household characteristics and household income. We then investigate whether these variables are related to households' financial decisions on home ownership, mortgages and ownership of risky assets. Our results are broadly in accordance with economic theory.     

Estimating Risk Attitudes using Lotteries: A Large Sample Approach

Attitudes towards risk play a major role in many economic decisions. In empirical studies it is quite often assumed that attitudes towards risk do not vary across individuals. This paper questions this assumption and analyses which factors influence an individual's risk attitude. Based on questions on lotteries in a large household survey we first semiparametrically estimate an index for risk aversion. We only make weak assumptions about the underlying decision process and our estimation method allows for generalisations of expected utility. We then estimate a structural model based on Cumulative Prospect Theory. Expected utility is strongly rejected and both the value function and the probability weighting function vary significantly with (among other things) age, income, and wealth of the individual.