Journal
GENEVA RISK AND INSURANCE REVIEW
Volume 34, Issue 2, Pages 117-139Publisher
PALGRAVE MACMILLAN LTD
DOI: 10.1057/grir.2009.6
Keywords
risk tolerance; health; longevity; life-cycle model; consumption; stated preference
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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. The Geneva Risk and Insurance Review (2009) 34, 117-139. doi: 10.1057/grir.2009.6
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