Paper #1443

Title:

Discrete choice estimation of risk aversion

Authors:

Jose Apesteguia and Miguel A. Ballester

Date:

September 2014

Abstract:

We analyze the use of discrete choice models for the estimation of risk aversion and show a fundamental flaw in the standard random utility model which is commonly used in the literature. Specifically, we find that given two gambles, the probability of selecting the riskier gamble may be larger for larger levels of risk aversion. We characterize when this occurs. By contrast, we show that the alternative random preference approach is free of such problems.

Keywords:

Discrete Choice; Structural Estimation; Risk Aversion; Random Utility Models; Random Preference Models.

JEL codes:

C25; D81.

Area of Research:

Behavioral and Experimental Economics / Microeconomics

Published in:

Mathematics and Archaeology, (eds) Barcelo, J.A.and Bogdanovic, I., Chapman & Hall/CRC, Boca Raton, USA, 491–499

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