Household portfolios and implicit risk aversion

We derive from a sample of US households the distribution of the risk aversion implicit in their portfolio choice. Our estimate minimizes the distance between the certainty equivalent return generated with observed portfolios and portfolios that are optimal in a mean-variance framework. Taking into account real wealth and constraints in portfolio composition, we obtain a median risk aversion coefficient of 2.7 and observe substantial heterogeneity across individuals. Our analysis informs that risk aversion reduces with wealth and education, and increases with age. Disregarding real wealth and constraints, our estimates are markedly larger and the direction of the above correlations differs. The inferred optimization bias is small, especially with over-simplified portfolios.