Stability of risk preference

No 2007-66, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Stability of preferences is central to how economists study behavior. This paper uses panel data on hypothetical gambles over lifetime income in the Health and Retirement Study to quantify changes in risk tolerance over time and differences across individuals. The maximum-likelihood estimation of a correlated random effects model utilizes information from 12,000 respondents in the 1992-2002 HRS. The results support constant relative risk aversion and career selection on preferences. While risk tolerance changes with age and macroeconomic conditions, persistent differences across individuals account for 73% of the systematic variation. The measure of risk tolerance also relates to actual stock ownership.

New Economics Papers: this item is included in nep-cbe and nep-upt
Date: 2007
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