Working Paper: NBER ID: w15686
Authors: Liran Einav; Amy Finkelstein; Iuliana Pascu; Mark R. Cullen
Abstract: We examine the extent to which an individual's actual insurance and investment choices display a stable ranking in willingness to bear risk, relative to his peers, across different contexts. We do so by examining the same individuals' decisions regarding their 401(k) asset allocations and their choices in five different employer-provided insurance domains, including health and disability insurance. We reject the null that there is no domain-general component of preferences. Among the five insurance domains, the magnitude of the domain-general component of preferences appears substantial; we find for example that one's choices in other insurance domains are substantially more predictive of one's choice in a given insurance domain than either one's detailed demographic characteristics or one's claims experience in that domain. However, we find considerably less predictive power between one's insurance choices and the riskiness of one's 401(k) asset allocations, suggesting that the common element of an individual's preferences may be stronger among domains that are "closer" in context. We also find that the relationship between insurance and investment choices appears considerably larger for employees who may be associated with better "financial sophistication." Overall, we view our findings as largely consistent with an important domain-general component of risk preferences.
Keywords: risk preferences; insurance choices; investment choices; domain generality
JEL Codes: D14; D81; G11; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| domain-general component of risk preferences (D81) | rejection of null hypothesis of no domain-general component (C12) |
| insurance choices in one domain (G52) | prediction of choices in another domain (C52) |
| insurance choices (G52) | 401k asset allocations (G11) |
| risk preferences (D81) | financial sophistication (G53) |