Nov. 2nd, Glenn Harrison, Ph.D.  – Asset Integration and Attitudes to Risk

Abstract: Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiment is consistent with partial asset integration: they behave as if some fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings.
Dr. Glenn Harrison, a guest of the IFREE/ESI Lecture Series
Bio: Glenn Harrison is the C.V. Starr Chair of Risk Management & Insurance and Director of the Center for the Economic Analysis of Risk, in the Department of Risk Management & Insurance, J. Mack Robinson College of Business, Georgia State University. He has over 150 academic publications, and his current research interests include risk and uncertainty, experimental economics, econometrics, risk management, development economics, and the economics of the first world poor. Professor Harrison has also been a consultant for numerous government agencies and private bodies. Professor Harrison is a Pisces, and loves red wine, one Swedish woman, and one American daughter. Before academic life, Professor Harrison played Australian “no-rules” football for Hawthorn in the Australian Football League, kicking one goal in his career.