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Relative risk aversion models: How plausible are their assumptions?

Author

Listed:
  • Carlo Barone

    (Sciences Po, France)

  • Katherin Barg

    (University of Exeter, UK)

  • Mathieu Ichou

    (Institut national d’études démographiques, France)

Abstract

This work examines the validity of the two main assumptions of relative risk-aversion models of educational inequality. We compare the Breen-Goldthorpe (BG) and the Breen-Yaish (BY) models in terms of their assumptions about status maintenance motives and beliefs about the occupational risks associated with educational decisions. Concerning the first assumption, our contribution is threefold. First, we criticise the assumption of the BG model that families aim only at avoiding downward mobility and are insensitive to the prospects of upward mobility. We argue that the loss-aversion assumption proposed by BY is a more realistic formulation of status-maintenance motives. Second, we propose and implement a novel empirical approach to assess the validity of the loss-aversion assumption. Third, we present empirical results based on a sample of families of lower secondary school leavers indicating that families are sensitive to the prospects of both upward and downward mobility, and that the loss-aversion hypothesis of BY is empirically supported. As regards the risky choice assumption, we argue that families may not believe that more ambitious educational options entail occupational risks relative to less ambitious ones. We present empirical evidence indicating that, in France, the academic path is not perceived as a risky option. We conclude that, if the restrictive assumptions of the BG model are removed, relative-risk aversion needs not drive educational inequalities.

Suggested Citation

  • Carlo Barone & Katherin Barg & Mathieu Ichou, 2021. "Relative risk aversion models: How plausible are their assumptions?," Rationality and Society, , vol. 33(2), pages 143-175, May.
  • Handle: RePEc:sae:ratsoc:v:33:y:2021:i:2:p:143-175
    DOI: 10.1177/1043463121994087
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    References listed on IDEAS

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    1. Eskil Heinesen & Richard Davies & Anders Holm, 2002. "The relative risk aversion hypothesis of educational choice," Journal of Population Economics, Springer;European Society for Population Economics, vol. 15(4), pages 683-713.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Schnepf, Sylke V., 2014. "Do Tertiary Dropout Students Really Not Succeed in European Labour Markets?," IZA Discussion Papers 8015, Institute of Labor Economics (IZA).
    4. Liam C. Malloy, 2015. "Loss aversion, education, and intergenerational mobility," Education Economics, Taylor & Francis Journals, vol. 23(3), pages 318-337, June.
    5. Nicholas C. Barberis, 2013. "Thirty Years of Prospect Theory in Economics: A Review and Assessment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 173-196, Winter.
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    Cited by:

    1. Anton B Andersson & Carlo Barone & Martin Hällsten, 2023. "Are upper-secondary track decisions risky? Evidence from Sweden on the assumptions of risk-aversion models," Rationality and Society, , vol. 35(3), pages 311-337, August.
    2. Daniela Bellani & Luis Ortiz-Gervasi, 2022. "Parental time preferences and educational choices: The role of children’s gender and of social origin," Rationality and Society, , vol. 34(1), pages 96-125, February.

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