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How General Are Risk Preferences? Choices Under Uncertainty in Different Domains

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Author Info

  • Mark Cullen

    ()
    (School of Medicine, Stanford University)

  • Liran Einav

    ()
    (Economics Department, Stanford University)

  • Amy Finkelstein

    ()
    (Demartment of Economics, MIT)

  • Iuliana Pascu

    ()
    (Department of Economics, MIT)

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    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 that one's choices in other insurance domains are sub-stantially 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 consistent with an important domain-general component of risk preferences.

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    Bibliographic Info

    Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 09-005.

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    Date of creation: Jan 2010
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    Handle: RePEc:sip:dpaper:09-005

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    1. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
    2. Dohmen, Thomas J. & Falk, Armin & Huffman, David & Sunde, Uwe & Schupp, Jürgen & Wagner, Gert G., 2009. "Individual risk attitudes: Measurement, determinants and behavioral consequences," Munich Reprints in Economics 20049, University of Munich, Department of Economics.
    3. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," Working Papers wp114, University of Michigan, Michigan Retirement Research Center.
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    10. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Lost In State Space: Are Preferences Stable?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 1091-1112, 08.
    11. V. Kerry Smith & Donald H. Taylor & Frank A. Sloan, 2001. "Longevity Expectations and Death: Can People Predict Their Own Demise?," American Economic Review, American Economic Association, vol. 91(4), pages 1126-1134, September.
    12. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
    13. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2006. "Who is “Behavioral”? Cognitive Ability and Anomalous Preferences," Levine's Working Paper Archive 122247000000001334, David K. Levine.
    14. Schoemaker, Paul J H, 1993. " Determinants of Risk-Taking: Behavioral and Economic Views," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 49-73, January.
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