Effects of Health and Longevity on Financial Risk Tolerance

James Hammitt, Kevin Haninger () and Nicolas Treich
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Kevin Haninger: U.S. Environmental Protection Agency, 1200 Pennsylvania Avenue, NW, Room 3417G, EPA West, Mail Code 5101T, Washington, D.C. 20460, U.S.A.

The Geneva Risk and Insurance Review, 2009, vol. 34, issue 2, 117-139

Abstract: We investigate the effects of health and life expectancy on tolerance of financial risk. Using a standard life-cycle model, we find that the effects of health and life expectancy on preferences over lifetime-income risk are theoretically ambiguous. However, risk tolerance is independent of health and life expectancy when utility takes one of the standard (harmonic absolute risk aversion) functional forms or when optimal consumption is constant over time. Our empirical results, using data from a stated-preference survey (n=2,795), suggest that financial risk tolerance is positively associated with both health and life expectancy; hence utility is not consistent with standard functional forms.

Date: 2009
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