On a Simple Measure of Individual Risk Aversion

We ask individuals for their reservation price of a specified lottery and deduce their ArrowPratt measure of risk aversion. This allows direct testing of common hypotheses on risk attitudes in three datasets. We find that risk aversion indeed falls with income and wealth. Entrepreneurs are less risk averse than employees, civil servants are more risk averse than private sector employees, and women are more risk averse than men. We analyze six different specifications of the lottery question in a single data set and find quite consistent results. We conclude that a simple lottery question is a promising survey instrument to extract differences in risk attitudes among individuals. JEL code D81;C81 FILE: RISKRHO.DEF; first draft 1997; this draft 14/08/00 correspondence to: [email protected] We gratefully acknowledge comments by Roel Beetsma, Mars Cramer, Martin Fase, Peter Kennedy, Hessel Oosterbeek, Hans van Ophem, Joep Sonnemans and Wim Vijverberg and by seminar participants in Tilburg (NAKE Meetings), Amsterdam, Bonn (IZA), Muenchen (SELAPO), Christchurch (University of Canterbury), Auckland, Canberra (ANU).