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Author: Orazem, Peter
Resulting in 2 citations.
1. Cho, In Soo
Orazem, Peter
Risk Aversion or Risk Management?: How Measures of Risk Aversion Affect Firm Entry and Firm Survival
Working Paper No. 11016, Department of Economics, Iowa State University, August 2011
Cohort(s): NLSY79
Publisher: Department of Economics, Iowa State University
Keyword(s): Attitudes; Cognitive Ability; Earnings; Entrepreneurship; Firms; Occupations; Risk Perception; Risk-Taking; Self-Employed Workers

Permission to reprint the abstract has not been received from the publisher.

The link between measured risk aversion and the decision to become an entrepreneur is well established, but the link between risk preferences and entrepreneurial success is not. Standard theoretical models of occupational choice under uncertainty imply a positive correlation between an individual’s degree of risk aversion and the expected return from an entrepreneurial venture at the time of entry. Because the expected return is the risk neutral equivalent value, a higher expected return implies a higher survival probability, and so more risk averse entrepreneurs should survive more frequently than their less risk averse counterparts. We test that prediction using successive entry cohorts of young entrepreneurs in the National Longitudinal Survey of Youth 1979 (NLSY79). The empirical results soundly reject the prediction: the most successful entrepreneurs are the least risk averse. This surprising finding calls into question the interpretation of common measures of risk aversion as measures of taste for risk. Instead, measured risk attitudes perform as if they are indicators of entrepreneurial ability– the least risk averse are apparently those who can best assess and manage risks. Indeed, our interpretation is consistent with the work of recent experimental studies that find that the less risk averse have higher cognitive ability.
Bibliography Citation
Cho, In Soo and Peter Orazem. "Risk Aversion or Risk Management?: How Measures of Risk Aversion Affect Firm Entry and Firm Survival." Working Paper No. 11016, Department of Economics, Iowa State University, August 2011.
2. Cho, Insoo
Orazem, Peter
Rosenblat, Tanya
Are Risk Attitudes Fixed Factors or Fleeting Feelings?
Journal of Labor Research 39,2 (June 2018): 127-149.
Also: https://link.springer.com/article/10.1007/s12122-018-9262-2
Cohort(s): NLSY79
Publisher: Springer
Keyword(s): Attitudes; Labor Force Participation; Risk-Taking

Permission to reprint the abstract has not been received from the publisher.

We investigate the stability of measured risk attitudes over time, using a 13-year longitudinal sample of individuals in the National Longitudinal Survey of Youth 1979. We find that an individual's risk aversion changes systematically in response to personal economic circumstances. Risk aversion increases with lengthening spells of employment and time out of labor force, and decreases with lengthening unemployment spells. However, the most important result is that the majority of the variation in risk aversion is due to changes in measured individual tastes over time and not to variation across individuals. These findings that measured risk preferences are endogenous and subject to substantial measurement errors suggest caution in interpreting coefficients in models relying on contemporaneous, one-time measures of risk preferences.
Bibliography Citation
Cho, Insoo, Peter Orazem and Tanya Rosenblat. "Are Risk Attitudes Fixed Factors or Fleeting Feelings?" Journal of Labor Research 39,2 (June 2018): 127-149.