Journal
QUARTERLY JOURNAL OF FINANCE
Volume 2, Issue 4, Pages -Publisher
WORLD SCIENTIFIC PUBL CO PTE LTD
DOI: 10.1142/S2010139212500206
Keywords
Risk tolerance; risk aversion; correlated random effects; interval regression
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Funding
- National Institute on Aging Pre-Doctoral Training Fellowship
- University of Michigan Institute for Social Research
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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. Maximum-likelihood estimation of a correlated random effects model utilizes information from 12,000 respondents in the 1992 - 2002 HRS. The results are consistent with constant relative risk aversion and career selection based on preferences. While risk tolerance changes with age and macroeconomic conditions, persistent differences across individuals account for over 70% of the systematic variation.
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