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Imputing Risk Tolerance from Survey Responses

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13337.

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Date of creation: Aug 2007
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Publication status: published as Kimball, Miles S & Sahm, Claudia R & Shapiro, Matthew D, 2008. "Imputing Risk Tolerance From Survey Responses," Journal of the American Statistical Association, American Statistical Association, vol. 103(483), pages 1028-1038.
Handle: RePEc:nbr:nberwo:13337

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  1. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  2. Heaton, John & Lucas, Deborah, 1997. "Market Frictions, Savings Behavior, And Portfolio Choice," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 76-101, January.
  3. Carroll, Christopher D. & Kimball, Miles S., 2006. "Precautionary Saving and Precautionary Wealth," CFS Working Paper Series 2006/02, Center for Financial Studies (CFS).
  4. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  5. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  6. Claudia R. Sahm, 2007. "Stability of risk preference," Finance and Economics Discussion Series 2007-66, Board of Governors of the Federal Reserve System (U.S.).
  7. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
  8. repec:cup:macdyn:v:1:y:1997:i:1:p:76-101 is not listed on IDEAS
  9. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  10. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  11. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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  1. Dan Benjamin, Mark Fontana and I Design an In-Depth Risk Aversion Survey
    by ? in Confessions of a Supply-Side Liberal on 2013-03-01 08:01:36
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