Working Paper: NBER ID: w13337
Authors: Miles S. Kimball; Claudia R. Sahm; Matthew D. Shapiro
Abstract: Economic theory assigns a central role to risk preferences. This paper develops a measure of relative risk tolerance using responses to hypothetical income gambles in the Health and Retirement Study. In contrast to most survey measures that produce an ordinal metric, this paper shows how to construct a cardinal proxy for the risk tolerance of each survey respondent. The paper also shows how to account for measurement error in estimating this proxy and how to obtain consistent regression estimates despite the measurement error. The risk tolerance proxy is shown to explain differences in asset allocation across households.
Keywords: risk tolerance; survey responses; asset allocation; measurement error
JEL Codes: C24; C42; E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk preferences (D81) | financial behaviors (G53) |
| demographic factors (J11) | asset allocation (G11) |
| risk tolerance (G11) | demographic factors (J11) |
| risk tolerance (G11) | asset allocation (G11) |
| risk tolerance proxy (G34) | asset allocation (G11) |