Risky Business: Examining the Link Between Poverty and Risk-Aversion Through Risk-Attitude Determinants

Abstract

Poverty continues to be one of the world’s most pressing and complex issues. Poverty reduction efforts are more important than ever given the exacerbating effects of COVID-19. One avenue is to study the decision-making and risk-attitudes of individuals in poverty. However, a review of the literature finds that research is inconclusive on the relationship between wealth/poverty and risk-attitudes. Haushofer and Fehr (2014) uses a framework of linking poverty to increased stress and then linking increased stress to higher risk-aversion to suggest that individuals in poverty are more risk-averse. However, no other determinants of risk-attitude are explored using this framework to investigate the poverty and risk-attitude relationship. Therefore, this paper aims to add to the literature by attempting to draw a more comprehensive understanding of how poverty and risk-attitudes are related by examining how poverty mediates other unexplored determinants of risk-attitude, such as education, exposure to crime and violence, and parenting styles. I find that while education does not offer any additional insights, the latter two determinants do. Living in poverty increases exposure to crime and violence, and exposure to crime/violence has been shown to be linked to higher risk-aversion. Poorer parents are more likely to parent in an authoritarian style, and authoritarian parenting tends to raise risk-averse children. Taken together, evidence through exposure to crime/violence and parenting styles both suggest that poverty is linked to higher risk-aversion.