Discrete Choice Estimation of Risk Aversion

• Authors: Miguel Ángel Ballester and Jose Apesteguia.
• BSE Working Paper: 788 | September 15
• Keywords: Risk Aversion , structural estimation , discrete choice , random utility models , random preference models
• JEL codes: C25, D81
• Risk Aversion
• structural estimation
• discrete choice
• random utility models
• random preference models

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.