The effect of additional background risk on mixed risk behavior

Abstract

Although economics has mainly focused on the measurement of risk aversion, this is only a partial measure of an individual’s risk profile. Further, background risks may also affect an individual’s decisions. We use a risk apportionment approach to measure individual higher order risk attitudes before and after an increase in background risk. We focus on risk aversion, prudence and temperance. Results indicate that around 17% of our sample is mixed risk-loving in our online experiment. After the increase in background risk, the proportion of mixed risk-averse individuals increases, driven by an increase in risk-averse choices. Our findings suggest that one-size-fits-all policies should be flexible to incorporate the heterogeneity of individual risk profiles, as well as changes in individual and overall risk conditions.