Risk Averters that Love Risk? Marginal Risk Aversion in Comparison to a Reference Gamble |
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| Authors: | David R Just and Travis J Lybbert |
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| Institution: | David R. Just and Travis J. Lybbert are associate professor in Applied Economics and Management, Cornell University and assistant professor in Agricultural and Resource Economics, University of California-Davis and member of the Giannini Foundation for Agricultural Economics. |
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| Abstract: | We propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles. We measure marginal risk aversion in two dimensions—mean and variance. Data from a field experiment is used to study marginal risk aversion. Our results suggest that individuals rely on a reference gamble when assessing marginal risk. Individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude—suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior. |
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| Keywords: | certainty effect marginal risk aversion probability weighting risk aversion |
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