Is Risk Aversion Really Correlated with Wealth?

make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Is Risk Aversion Really Correlated with Wealth? How estimated probabilities introduce spurious correlation Economists attribute many common behaviors to risk aversion and frequently focus on how wealth moderates risk preferences. This paper highlights a problem associated with empirical tests of the relationship between wealth and risk aversion that can arise when the probabilities individuals face are unobservable to researchers. The common remedy for unobservable probabilities involves the estimation of probabilities in a profit or production that includes farmer, farm and agro-climatic variables. Unfortunately, these variables are often correlated with wealth such that estimated probabilities are likely to leave statistical fingerprints on subsequently-estimated risk aversion coefficients and may thereby introduce spurious correlations between wealth and risk preferences. In this paper, we use data from an experiment conducted among 290 Indian farmers to detect these spurious correlations. We estimat