Abstract
We investigate the stability of measured risk attitudes over time, using a 13-year longitudinal sample of individuals in the National Longitudinal Survey of Youth 1979. We find that an individual’s risk aversion changes systematically in response to personal economic circumstances. Risk aversion increases with lengthening spells of employment and time out of labor force, and decreases with lengthening unemployment spells. However, the most important result is that the majority of the variation in risk aversion is due to changes in measured individual tastes over time and not to variation across individuals. These findings that measured risk preferences are endogenous and subject to substantial measurement errors suggest caution in interpreting coefficients in models relying on contemporaneous, one-time measures of risk preferences.
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Notes
The Panel Study of Income Dynamics (PSID), the Health and Retirement Study (HRS), and the Socioeconomic Panel (SOEP) also provide hypothetical lifetime income gamble questions. Several studies show that the measures of risk attitudes elicited from the traditional lottery-type survey questions are significantly related to several behaviors such as holding stocks, being self-employed, participating in sports, and smoking (Barsky et al. 1997; Dohmen et al. 2012). Such risky behavior can be alternative measures of risk attitudes.
For robustness, we also used a balanced panel data. As discussed below, the results are not sensitive to the use of a balanced panel data.
See Appendix 1 for full derivation of Eq. (1).
Marital status, fertility behavior, and education may be a consequence of risk preferences rather than a causal factor. However, none of our results are sensitive to the inclusion or exclusion of these factors, and so we include them for completeness.
The exception is Barsky et al. (1997) who used a sample of 50–70 year-olds from the Health and Retirement Study (HRS) and found that risk aversion starts to decrease at age 60.
A further robustness check was undertaken by estimating the Eq. (3) over a 4-year time span. The result is reported in Appendix Table 7. Several economic variables lost the statistics’ significance based on the fixed effects model. The only statistically significant economic variable is employment duration. Nevertheless, we still conclude the same for the joint significance test—economic factors are still jointly significant (F 7,n-7 = 3, p = 0.004) while the individual demographics are not jointly significant (F 5,n-5 = 1.78, p > 0.1). The within variance also remains at 55%. The random effects estimation shows generally consistent results with those based on the 13 year time span.
Expanding the sample to include individuals with only partial information on demographic or economic variables does not change our conclusions. See Appendix Table 8.
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Appendices
Appendix 1
With n individuals in the sample and 4 temporally separated measures of risk aversion for each individual i, the total sum of square (TSS) is given by
where \( \overline{\theta}=\frac{1}{n}\sum \limits_{i=1}^n{\overline{\theta}}_{i0} \) and \( {\overline{\theta}}_{i0}=\frac{1}{4}\sum \limits_{t=1}^4{\theta}_{it} \).
Summing over the first t yields
Appendix 2
Appendix 3
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Cho, I., Orazem, P.F. & Rosenblat, T. Are Risk Attitudes Fixed Factors or Fleeting Feelings?. J Labor Res 39, 127–149 (2018). https://doi.org/10.1007/s12122-018-9262-2
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DOI: https://doi.org/10.1007/s12122-018-9262-2