Essays on the Measurement Sensitivity of Risk Aversion and Causal Effects in Education

PhD Thesis# 451
PhD Adam (A.S.) Booij
Prof. B.M.S. van Praag


Economists' traditional view of the expected utility model as describing decision under risk has long been challenged. The measurement of risk attitudes and the associations thereof with individual characteristics, however, have only recently been adapted to accommodate for the contemporary views on behavior. This thesis shows that the measurement of risk attitudes may be confounded with time preferences if individuals are credit constrained. What is actually impatience will be wrongfully attributed to risk aversion in that case. Likewise, if we view behavior through the lens of prospect theory, this thesis shows that individuals' small stake risk aversion is mainly caused by loss aversion and that differences in risk taking behavior by gender and schooling are wrongfully ascribed to marginal utility of wealth in the traditional model. The non-linear transformation of utilities also adds to this bias. In the final chapter a general risk attitude measure is associated to real behavior and it is found that higher education students in the Netherlands who are more risk averse borrow less from the government to finance their studies. The study shows that informing students is not an effective instrument to increase borrowing.

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