Risk Aversion, Wealth and Background Risk¤

We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to enter a lottery. We relate this measure to consumers’ endowment and attributes and to measures of background risk. We ...nd that risk aversion is a decreasing function of endowment thus rejecting CARA preferences but that the elasticity to consumption is far below the unitary value predicted by CRRA utility. We also ...nd that households’ attributes are of little help in predicting their degree of risk aversion, which is characterized by massive unexplained heterogeneity. However, consumers’ environment a¤ects risk aversion. Individuals who are more likely to face income uncertainty exhibit a higher degree of absolute risk aversion, consistent with recent theories of attitudes towards risk in the presence of uninsurable risks. We also ...nd that risk attitudes have considerable predictive power on several household decisions, including occupation and portfolio choice, moving decisions and health status. JEL Classi...cation: D1, D8