Model uncertainty and international differences in risk aversion revisited

Existing studies have found both implausibly high levels of risk aversion and significant differences in risk aversion across countries. One interpretation of the former in the literature is that, once model uncertainty is taken into account, agents with implausibly high risk aversion are not as timid as we might think. In this paper, we provide additional evidence in favor of this interpretation, using data for 11 developed countries. We also show that most countries have higher model detection error probabilities than the United States, and that large differences in risk aversion can arise at moderate levels of model detection error probabilities.