Risk aversion, wealth, and the DARA hypothesis: A new test

Eisenhauer, Joseph G.

doi:10.1007/bf02295000

Cited by 14 publications

(8 citation statements)

References 16 publications

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“…This suggests that households carrying term insurance on the head of the household tend to exhibit increasing rather than constant or decreasing absolute risk aversion; this nding is consistent with time-series results obtained by Eisenhauer (1997). Moreover, the wealth effect is approximately 0.0368, and the mean value of u = 0.6224.…”

Section: Data and Empirical Resultssupporting

confidence: 88%

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Prudence, risk aversion, and the demand for life insurance

Eisenhauer¹,

Halek²

1999

Applied Economics Letters

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We estimate the effect of household wealth on the demand for life insurance using survey data from a broad cross-section of the USA. This procedure allows us to test the Pratt-Arrow hypothesis of decreasing absolute risk aversion (DARA). Additionally, we estimate the relative magnitude of prudence, the propensity to take precautions when faced with risk. We find that life insurance purchases increase with wealth, and that on average American households exhibit about 94 per cent as much prudence as risk aversion. On the basis of this evidence, we reject the DARA hypothesis.

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Section: Data and Empirical Resultssupporting

confidence: 88%

“…Studies by Grossberg (1991) and Kuehlwein (1991), for example, failed to observe precautionary saving, and by implication, found no evidence of prudence. Similarly, studies of the DARA hypothesis have yielded mixed results (see Szpiro, 1983;Wolf and Pohlman, 1983;Levy, 1994;Eisenhauer, 1997).…”

Section: Introductionmentioning

confidence: 95%

Prudence, risk aversion, and the demand for life insurance

Eisenhauer¹,

Halek²

1999

Applied Economics Letters

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“…Unfortunately, empirical findings on the validity of the uniform DARA hypothesis have been mixed. Based on life insurance demand data, Eisenhauer (1997) and Eisenhauer and Halek (1999) have found positive correlations between life insurance demand and wealth (assets) and hence have rejected the uniform DARA hypothesis, using Mossin's (1968) proposition (Corollary 1 in this article). Szpiro (1983) finds only limited support for the DARA hypothesis based on nonlife insurance demand data.…”

Section: Some Important Implicationsmentioning

confidence: 77%

When Is a Coinsurance‐Type Insurance Policy Inferior or Even Giffen?

Hau¹

2008

J of Risk & Insurance

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This article derives the necessary and sufficient conditions for a coinsurance-type insurance policy covering a particular risk to be inferior and to be Giffen. Mossin's decreasing absolute risk aversion assumption for insurance to be inferior is avoided. The result generalizes Hoy and Robson and Briys, Dionne, and Eeckhoudt's results to the case with a continuum of states and relaxes their assumption of constant relative risk aversion. It is shown that knowledge about the distribution of risk can be used to relax assumptions on an utility function for a coinsurance-type insurance policy to be inferior and to be Giffen. Copyright (c) The Journal of Risk and Insurance, 2008.

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“…Additional evidence could be cited as well Siegel and Hoban (1982),. for example, also found DRRA for narrowly defined wealth and IRRA for a broader wealth measure that included nonmarketable and contingent (i.e., uncertain) assets.2 This research encompasses such areas as investment behavior(Jackwerth, 2000), agricultural production and storage(Abdulkadri et al, 2003), insurance purchasing(Eisenhauer, 1997;Eisenhauer and Halek, 1998), and gambling(Hamid et al, 1996).…”

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confidence: 95%

Social Security Programs and Retirement Around the World: Micro‐Estimation, edited by Jonathan Gruber and David A. Wise

2007

J of Risk & Insurance

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Moshe A. Milevsky is one of the most skillful and engaging writers of our profession. His recent book, notwithstanding its rather daunting title-The Calculus of Retirement Income-is refreshingly written in a conversational first person voice and surpasses the already high expectations that his previous work has fostered.Professor Milevsky does a remarkable job at melding several disciplines in his text: financial economics, insurance, mathematics, and actuarial science. The text serves as a bridge for actuaries into the world of finance, and for financial economists into the world of pensions, insurance, and actuarial science. This user-friendly bridge is not only a notable achievement but an essential step toward joining the insights achievable through the various disciplines and equipping researchers to make further advances in the fields of pensions and retirement income.Milevsky introduces and develops, from the financial economics perspective, the basic actuarial models that underlie the pricing and risk analysis of life-contingent annuities, pensions, and life insurance. He handles the mathematical and actuarial models so deftly that a person with a basic understanding of calculus and finance would find his text quite accessible. Moreover, he sprinkles his analysis with practical and witty examples (such as folk wisdom from the famous Brazilian playboy, the late Jorge Guinle) that demonstrate to the reader their relevance and analytical power of the tools presented.He introduces the challenges of rational wealth decumulation at retirement through the metaphor of a drunk gambler he once witnessed who exhibited a rather curious roulette wagering and waitress tipping strategy. Here is not the place to reveal the parallels he draws between the drunk gambler and the retiree facing investment and consumption decisions, but suffice it to say that they rivet the reader's attention and impel her to turn the next page. Next, he presents the demographics and economics of what has been termed the central policy concern of our time-providing retirement security for our aging populations. 1

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Risk aversion, wealth, and the DARA hypothesis: A new test

Abstract: The Pratt-Arrow hypothesis of decreasing absolute risk aversion (DARA)

Cited by 14 publications

References 16 publications

Prudence, risk aversion, and the demand for life insurance

Prudence, risk aversion, and the demand for life insurance

When Is a Coinsurance‐Type Insurance Policy Inferior or Even Giffen?

Social Security Programs and Retirement Around the World: Micro‐Estimation, edited by Jonathan Gruber and David A. Wise

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