Hanna, 2004(2), An Improved Measure of Risk Aversion

Financial
Counseling and Planning

The Journal of the
Association for Financial
Counseling and
Planning Education


VolumeĀ  15(2),
2004


An Improved Measure of
Risk Aversion

Sherman D. Hanna and Suzanne Lindamood

    This study
    investigates
    financial risk aversion using an improved measure based on income
    gambles and rigorously related to optimal portfolio choices.The new
    measure modifies a previous measure by adding graphical presentations
    to clarify the impact of different income choices. We compared the
    measure’s responses to those of previous non-graphical versions. To
    enable comparisons to an established risk measure, we also asked the
    Survey of Consumer Finances (SCF) risk tolerance question. Based on
    responses from 152 students, there is a significant correlation between
    relative risk aversion estimates based on the new measure and the SCF
    question.

    Keywords: Investments, Risk tolerance, Risk aversion