Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2011/12: Risk Aversion in the Large and in the Small

Jørgen Haug (), Thorsten Hens () and Peter Wöhrmann ()
Additional contact information
Jørgen Haug: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Thorsten Hens: Dept. of Banking and Finance, University of Zurich, Postal: University of Zurich, Department of Banking and Finance, Plattenstrasse 32, CH-8032 Zürich, Switzerland
Peter Wöhrmann: Dept. of Management Science and Engineering, Stanford University, Postal: Huang Engineering Center, 475 Via Ortega, Stanford University, Stanford, California 94305-4121, USA

Abstract: Estimates of agents' risk aversion differ between market studies and experimental studies. We demonstrate that the estimates can be reconciled through consistent treatment of agents' tendency for narrow framing, regarding integration of background wealth as well as across risky outcomes: Risk aversion is similar whenever similar degrees of narrow framing is assumed in either setting.

Keywords: Risk aversion; narrow framing; background wealth; laboratory experiments; market studies; equity premium puzzle

JEL-codes: D81; G11; G12

18 pages, June 28, 2011

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