Risk Averters that Love Risk? Marginal Risk Aversion in Comparison to a Reference Gamble

We propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles. We measure marginal risk aversion in two dimensions-mean and variance. Data from a field experiment is used to study marginal risk aversion. Our results suggest that individuals rely on a reference gamble when assessing marginal risk. Individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude-suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior.