Pure rank preferences and variation in risk-taking behavior

Oded Stark; Wiktor Budzinski; Marcin Jakubek

doi:10.1016/j.econlet.2019.108636

Pure rank preferences and variation in risk-taking behavior

Oded Stark^*, Wiktor Budzinski, Marcin Jakubek

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual's risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

Original language	English
Article number	108636
Journal	Economics Letters
Volume	184
DOIs	https://doi.org/10.1016/j.econlet.2019.108636
State	Published - Nov 2019
Externally published	Yes

Keywords

Rank in the wealth distribution
Rank-based utility
Relative risk aversion
Variation in risk-taking behavior

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10.1016/j.econlet.2019.108636

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title = "Pure rank preferences and variation in risk-taking behavior",

abstract = "Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual's risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.",

keywords = "Rank in the wealth distribution, Rank-based utility, Relative risk aversion, Variation in risk-taking behavior",

author = "Oded Stark and Wiktor Budzinski and Marcin Jakubek",

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AU - Budzinski, Wiktor

AU - Jakubek, Marcin

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N2 - Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual's risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

AB - Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual's risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

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KW - Rank-based utility

KW - Relative risk aversion

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Pure rank preferences and variation in risk-taking behavior

Abstract

Keywords

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