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The Analysis of Risk Attitude Amongst Family Members

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  • Philomena M. Bacon

    (Department of Economics, Lancaster University Management School, United Kingdom)

  • Anna Conte

    (University of Westminster, London, UK, and Max-Planck-Institute of Economics, Jena)

  • Peter G. Moffatt

    (School of Economics, University of East Anglia, Norwich, United Kingdom)

Abstract

The determinants of risk attitude amongst family members are explored using data from the German Socio-Economic Panel over the period 2004 to 2009. The focus of the analysis is the repeated responses to the survey question about general willingness to take risk. Responses to this question are provided on a 0-10 Likert scale. We respect both the ordinality and the panel structure of the data by estimating the random effects ordered probit model. We divide household members into thee types: heads, spouses and offspring. Of the three types, we find that spouses are the most risk averse, and offspring the least risk averse. In view of these findings, we estimate the model separately for the three groups and find different results between the three. For example, household income has a positive effect (on risk-taking) for heads and spouses (particularly strong for spouses), but no effect on offspring. Some effects are similar between the the three groups; for example, risk aversion always increases with age. In the offspring equation, we include both the head's and the spouse's risk attitude as explanatory variables, and find that both have a significantly positive effect on the offspring's risk-attitude, indicating that children tend to inherit the risk attitude of their guardians. We then focus on couples in the data set, and we apply the random effects bivariate ordered probit model to the analysis of the simultaneous determination of the male's and the female's risk attitude. In this model, the individual-specific effects for the male and the female are assumed to have a non-zero correlation, which is estimated to be +0.412. This significantly positive correlation is interpreted as a form of homophily: individuals tend to form partnerships with others having a similar risk attitude. The importance of respecting the ordinality of the data is confirmed when a straightforward (linear) seemingly unrelated model is applied to the same problem; this gives a correlation of only +0.27: a seriously downward-biased estimate of this key parameter.

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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2011-069.

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Date of creation: 2011
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Handle: RePEc:jrp:jrpwrp:2011-069

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Keywords: Multiple Equation Models; Panel Data; Risk Attitude;

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  1. Daniela Di Cagno & Emanuela Sciubba & Marco Spallone, 2012. "Choosing a gambling partner: testing a model of mutual insurance in the lab," Theory and Decision, Springer, Springer, vol. 72(4), pages 537-571, April.
  2. John List & David Reiley, 2008. "Field experiments," Artefactual Field Experiments, The Field Experiments Website 00091, The Field Experiments Website.
  3. Guillaume R. Frechette, 2001. "Random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, StataCorp LP, vol. 10(59).
  4. Ian Bateman & Alistair Munro, 2005. "An Experiment on Risky Choice Amongst Households," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(502), pages C176-C189, 03.
  5. Masclet, David & Colombier, Nathalie & Denant-Boemont, Laurent & Lohéac, Youenn, 2009. "Group and individual risk preferences: A lottery-choice experiment with self-employed and salaried workers," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 70(3), pages 470-484, June.
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