Spousal Risk Preferences and Household Investment Decisions

Michael P. Brady and Bidisha Mandal

No 103764, 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania from Agricultural and Applied Economics Association

Abstract: Most adults are married, plan for retirement with their spouse, and pool assets to a significant degree. How then are each individual’s risk preferences combined in choosing the portfolio that represents for them the optimal tradeoff between risk and return? There are two pathways through which marriage could amplify the expression of individual risk preferences at the household level. First, if people choose spouses in part based on their appetite for risk, or another characteristic correlated with risk tolerance, then there could be polarization of household level risk preferences towards extremes. Second, spouses may strategically adjust their decisions to compensate for their spouse’s preferences. Is an only mildly risk averse person that is married to someone that is nearly risk neutral motivated to choose a very low risk low return asset allocation to compensate for their spouse’s risky behavior? In this paper we explore the influence of marriage on the expression of individual risk preferences by examining both sorting in the marriage market and strategic decision making. Using data from the Health and Retirement Survey we find a positive correlation between the risk preferences of spouses. We also develop a theoretical model that determines optimal investment allocations conditional on own and spousal risk tolerance. Optimal asset allocations from this model are compared to a naïve model that only includes own risk tolerance. In related research the explanatory power of the naïve and spousal models are evaluated for prediction ability based on actual asset allocation decisions for couples using the HRS data.

Keywords: Consumer/Household; Economics (search for similar items in EconPapers)
Pages: 16
Date: 2011-05-03
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/103764/files/MarriageRisk_AAEA2011.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea11:103764

DOI: 10.22004/ag.econ.103764

Access Statistics for this paper

More papers in 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().