WP 2019-06 “Grabbing the Opportunity”: Risk Attitudes Among Poor Households in the US

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AUTHORS: Arianna Galliera and E. Elisabet Rutström

ABSTRACT: Not much is known about the heterogeneity of risk attitudes among poor households in rich countries. This paper provides measurements from a unique data set collected among the urban poor in Atlanta, Georgia. The data set includes lab-in-the-field experiments on the relationship between risk attitudes and several household characteristics. Apart from looking at income, wealth and education, we are particularly interested in household composition as it captures the number and kind of people who are dependant on the income of the household head. This is a largely neglected household characteristic. A larger household may be associated with the head being more risk averse due to the responsibility of caring for others. This may be especially true for households with very few resources, especially relatively fixed resources, like housing. We find that household composition measures are strongly correlated with risk attitudes, and that the housing constraint interacts with the size of the household in interesting ways. The correlation of the risk aversion with adult dependants is positive but the correlation with child dependants is negative, except when the housing constraint becomes more binding. Thus, when formulating or executing policy aimed at supporting poor urban households, it is important to recognize that poverty does not always imply higher risk aversion and responses to new policy will reflect such heterogeneity. Sometimes the poor are willing to take at least some small risks, in order to get a boost in income.