Correlation between Risk Aversion and Wealth distribution

TL;DR

This paper investigates how varying levels of risk aversion among economic agents influence wealth distribution, revealing that different risk profiles can lead to diverse distributions including power-law, exponential, and log-normal, with notable correlations between wealth and risk aversion.

Contribution

It introduces a model where agents have different risk aversion levels, showing how this affects wealth distribution and correlations, extending previous models with new insights.

Findings

Random risk aversion produces power-law and log-normal wealth distributions.

Uniform risk aversion leads to Gaussian or unfair distributions.

Strong correlations between wealth and risk aversion are observed.

Abstract

Different models of capital exchange among economic agents have been proposed recently trying to explain the emergence of Pareto's wealth power law distribution. One important factor to be considered is the existence of risk aversion. In this paper we study a model where agents posses different levels of risk aversion, going from uniform to a random distribution. In all cases the risk aversion level for a given agent is constant during the simulation. While for a uniform and constant risk aversion the system self-organizes in a distribution that goes from an unfair ``one takes all'' distribution to a Gaussian one, a random risk aversion can produce distributions going from exponential to log-normal and power-law. Besides, interesting correlations between wealth and risk aversion are found.