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THE RELATIONSHIP BETWEEN RELATIVE RISK AVERSION AND THE LEVEL OF EDUCATION: A SURVEY AND IMPLICATIONS FOR THE DEMAND FOR LIFE INSURANCE

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  • *[Correction added on 10 November 2014, after first online publication: affiliation of the author changed].

Abstract

The expected utility hypothesis has been widely used in the construction of economic models and numerous difficulties are encountered in attempting to take into account preferences toward risk in a real-world setting. More recently, attention has focused on comparative studies in economics and business in an international framework and problems related to the hypothesis of relative risk aversion (RRA). One ambiguous hypothesis is the relationship between the level of RRA and the level of education, which has been found either positive or negative. From a causality point of view, it may be argued that investors with a high level of education are less risk averse, but it may also be argued that less risk-averse individuals choose to pursue a higher level of education. The purpose of this paper is to survey the empirical literature on this subject. It provides evidence that risk aversion is negatively correlated with higher education and human development. The results have important implications for macroeconomic empirical studies and the demand for financial assets and more specifically on the demand for life insurance. Assuming the same degree of RRA for utility-maximizing consumers should be limited to homogeneous samples.

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