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.
Risk aversion Stability Variance decomposition Measurement error Within and between variance
This is a preview of subscription content, log in to check access.
Compliance with Ethical Standards
Conflict of Interest
The authors have no conflict of interest to declare.
Andersen S, Harrison GW, Lau MI (2008) Lost In State Space: Are Preferences Stable? Int Econ Rev 49(3):1091–1112CrossRefGoogle Scholar
Anderson LR, Mellor JM (2009) Are risk preferences stable? Comparing an experimental measure with a validated survey-based measure. J Risk Uncertain 39(2):137–160CrossRefGoogle Scholar
Barseghyan L, Prince J, Teitelbaum JC (2011) Are Risk Preferences Stable across contexts? Evidence from Insurable Data. Am Econ Rev 101(2):591–631CrossRefGoogle Scholar
Barsky RB, Juster FT, Kimball MS, Shapiro MD (1997) Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study. Q J Econ 112(2):537–579CrossRefGoogle Scholar
Bellemare MF, Brown ZS (2010) On The (Mis) Use of Wealth as a Proxy For Risk Aversion. Am J Agric Econ 92(1):273–282CrossRefGoogle Scholar
Binswanger HP (1980) Attitudes toward Risk: Experimental Measurement in Rural India. Am J Agric Econ 62(3):395–407CrossRefGoogle Scholar
Brown S, Dietrich M, Ortiz-Nuñez A, Taylor K (2011) Self-employment and attitudes towards risk: Timing and unobserved heterogeneity. J Econ Psychol 32(3):425–433CrossRefGoogle Scholar
Chuang Y, Schechter L (2015) Stability of experimental and survey measures of risk, time, and social preferences: A review and some new results. J Dev Econ 117:151–170CrossRefGoogle Scholar
Di Mauro C, Musumeci R (2011) Linking risk aversion and type of employment. J Socio-Econ 40(5):490–495CrossRefGoogle Scholar
Dohmen T, Falk A, Huffman D, Sunde U (2012) The Intergenerational Transmission of Risk and Trust Attitudes. Rev Econ Stud 79(2):645–677CrossRefGoogle Scholar
Donkers B, Melenberg B, Van Soest A (2001) Estimating risk attitudes using lotteries: A large sample approach. J Risk Uncertain 22(2):165–195CrossRefGoogle Scholar
Drichoutis AC, Nayga RM (2013) Eliciting risk and time preferences under induced mood states. J Socio-Econ 45:18–27CrossRefGoogle Scholar
Feinberg RM (1977) Risk Aversion, Risk, and the Duration of Unemployment. Rev Econ Stat 59(3):264–271CrossRefGoogle Scholar
Gerrans P, Faff R, Hartnett N (2015) Individual financial risk tolerance and the global financial crisis. Account Finance 55(1):165–185CrossRefGoogle Scholar
Guiso L, Paiella M (2008) Risk aversion, wealth, and background risk. J Eur Econ Assoc 6(6):1109–1150CrossRefGoogle Scholar