What would you prefer:
- Option A: Flip a coin with where if it lands heads you win $20 but if it lands on tails you get $0
- Option B: Win $10 for certain
If you prefer option A, you are risk loving; if you prefer option B you are risk averse. If you are indifferent between these choices you are risk neutral. A key question is, what share of individuals have these preferences and how strong are these preferences. For instance, a risk neutral person may prefer Option B up until the certainty equivalent was $8, then they may switch to Option A. A very risk averse person may prefer Option B until it was lowered to $5, and only then prefer Option A.
One way to measure the strength of these preferences is with a metric known as relative risk aversion.
A paper by Outreville (2014) provides an overview of some papers than aim to estimate relative risk aversion empirically. We find a wide range of RRA estimates.
![](https://www.healthcare-economist.com/wp-content/uploads/2022/02/Relative-Risk-Aversion-estimates-by-study.png)
We see that certain methodologies produce higher relative risk aversion estimates than others. Data collected from surveys and game shows produced similar estimates of risk aversion; estimates of relative risk aversion based on financial choices and insurance purchases show much higher levels of risk aversion.
![](https://www.healthcare-economist.com/wp-content/uploads/2022/02/Relative-Risk-Aversion-estimates-by-study-methodology.png)
The paper provides additional detail on how relative risk aversion varies across different individual characteristics (e.g., education, wealth, gender) and is worth a read.
- Outreville JF. Risk aversion, risk behavior, and demand for insurance: A survey. Journal of Insurance Issues. 2014 Oct 1:158-86.