Estimating Risk Attitudes in Denmark: A Field Experiment

We estimate individual risk attitudes using controlled experiments in the field in Denmark. These risk preferences are elicited by means of field experiments involving real monetary rewards. The experiments were carried out across Denmark using a representative sample of 253 people between 19 and 75 years of age. Risk attitudes are estimated for various individuals differentiated by socio-demographic characteristics such as income and age. Our results indicate that the average Dane is risk averse, and that risk neutrality is an inappropriate assumption to apply. We also find that risk attitudes vary significantly with respect to several important sociodemographic variables. Our results consistently support the need to recognize the heterogeneity of risk attitudes across individual subjects. This result has important implications for the characterization of risk attitudes in policy applications, theoretical modeling, and experimental economics. * Department of Economics, College of Business Administration, University of Central Florida, USA (Harrison and Rutström), and Centre for Economic and Business Research, Copenhagen, Denmark (Lau). E-mail contacts: [email protected], [email protected], and [email protected]. Rutström thanks the U.S. National Science Foundation for research support under grants NSF/IIS 9817518, NSF/MRI 9871019 and NSF/POWRE 9973669, and Harrison and Lau thank the Danish Social Science Research Council for research support under project #24-02-0124. Steffen Andersen provided superb research assistance and comments throughout. Supporting data and instructions are stored in the ExLab Digital Archive at http://exlab.bus.ucf.edu. 1 We elicit risk attitudes for individuals. To the extent that the characteristics of individuals are used to define “representative households,” we can refer to the individual and the household interchangeably. However, we remain agnostic concerning the way in which the individual risk attitudes of individual household members are aggregated into one household risk attitude. 2 Following Rabin [2000], there are some specifications of expected utility theory for which a finding of risk aversion at these levels of income is incoherent. This argument does not apply if expected utility theory is defined over income earned during the experiment, rather than over terminal lifetime wealth. Appendix A reviews this argument, and its relevance for experimental studies of risk aversion. -1Welfare analysis of major economic policy decisions such as those concerning education, employment, health care, international trade and retirement typically assume that individuals affected by the policy are risk neutral. Under such an assumption the expected value of the outcome serves as the measure of an individual’s or a group of individuals’ expected utility. This assumption is usually made out of convenience, since the true risk attitudes are rarely known. Nevertheless, the judgment that welfare assessments may be seriously biased if individuals are not risk-neutral is not controversial. Since risk attitudes are reflections of subjective preferences, one would expect a priori that they would differ across individuals, and therefore that many, if not all, would be risk averse.1 We elicit measures of individual risk attitudes from a representative sample of the Danish population in order to test three substantive hypotheses. The first hypothesis is that risk attitudes differ significantly from risk neutrality, such that the implicit assumption in cost-benefit analysis should be reviewed.2 The second hypothesis is that there are identifiable segments of the population across which risk attitudes differ in a systematic way, such that analysts should allow for observable heterogeneity in the data analysis. The third hypothesis is that relative risk aversion is not constant with respect to the income levels of the lottery prizes considered, such that one should avoid popular constant relative risk aversion specifications for policies defined over small income changes. We use survey questions with real monetary rewards to elicit risk attitudes and demonstrate the methodological complementarity between lab and field experiments. The survey questions are based on those used by Holt and Laury [2002], who elicited risk attitudes for university students using controlled laboratory experiments. We apply extended versions of these experimental procedures from the lab, but employ subjects that are more representative of individuals affected by