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After an accident or near-accident, we all tend to become more careful. One can attribute this to the realization that the odds of an accident are higher than we thought. But there may be more that just Bayesian updating, we may also become more risk averse with each such event in ways that also affect our tolerance for other risks. From an economic point of view, it is not well known how the aversion to financial risk is formed, and experience with adverse shocks of some sort may play here.
Alessandro Bucciol and Luca Zarri look at the US Health and Retirement Study, where risk aversion can be inferred from portfolio choices. They find that two life events matters significantly for the increase of risk aversion: the loss of a child and being in a natural disaster. Yet, I cannot help thinking that the result is not about risk aversion, but Bayesian updating for probabilities of rare events. While I have not suffered from such events, I have heard others say how they realized the value of life as they recovered from them. Are these statements of risk aversion or statements of how lucky they have been to survive and that they should revise the probabilities? When looking at portfolio choices, can these two be distinguished?
Alessandro Bucciol and Luca Zarri look at the US Health and Retirement Study, where risk aversion can be inferred from portfolio choices. They find that two life events matters significantly for the increase of risk aversion: the loss of a child and being in a natural disaster. Yet, I cannot help thinking that the result is not about risk aversion, but Bayesian updating for probabilities of rare events. While I have not suffered from such events, I have heard others say how they realized the value of life as they recovered from them. Are these statements of risk aversion or statements of how lucky they have been to survive and that they should revise the probabilities? When looking at portfolio choices, can these two be distinguished?
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