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Why risk attitude differs between macro and micro level? A decoherence perspective

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  • Yi, Zhen
  • Zhu, Chao
  • Zhang, Yuwei
Abstract
This paper aims to explain and solve the problem of the inconsistency of risk attitude between the micro and macro level, which theoretical models often ignore. There are significant differences between micro and macro level when using Chinese household-level and country-level data. We build a model with heterogeneous agents by introducing an interactive utility function and derive a compatible formula for estimating risk attitude. This formula restores the “Coherence” among micro individuals. In the explicit function form, we obtain an expression of the adjustment coefficient α, and then (1) macro risk attitude; (1) micro risk attitude; (3) the difference between them, and (4) what the difference comes from. From the logarithmic interactive utility function, the estimated RRA value is 5.7036, or approximately, the adjustment parameter. When taking the adjustment parameters into consideration, reserchers can obtain more accurate parameters. This paper inserts a term in the social utility function which summarizes the interaction between households and which leads to a modification of absolute/relative risk aversion. The contribution of the paper lies in an attempt at reconciling the micro and the macro parameter by referring to an insight borrowed from the “theory of decoherence” used in physics and help to set accurate parameters in utility function in the theoretical models.

Suggested Citation

  • Yi, Zhen & Zhu, Chao & Zhang, Yuwei, 2024. "Why risk attitude differs between macro and micro level? A decoherence perspective," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 978-997.
    • Handle: RePEc:eee:reveco:v:92:y:2024:i:c:p:978-997
    DOI: 10.1016/j.iref.2024.02.040
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    More about this item

    Keywords

    Risk attitudes; Decoherence; Additivity;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G00 - Financial Economics - - General - - - General

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