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Does health affect portfolio choice?

  • David A. Love
  • Paul A. Smith

A number of recent studies find that poor health is empirically associated with a safer portfolio allocation. It is difficult to say, however, whether this relationship is truly causal. Both health status and portfolio choice are influenced by unobserved characteristics such as risk attitudes, impatience, information, and motivation, and these unobserved factors, if not adequately controlled for, can induce significant bias in the estimates of asset demand equations. Using the 1992–2006 waves of the Health and Retirement Study, we investigate how much of the connection between health and portfolio choice is causal and how much is due to the effects of unobserved heterogeneity. Accounting for unobserved heterogeneity with fixed effects and correlated random effects models, we find that health does not appear to significantly affect portfolio choice among single households. For married households, we find a small effect (about 2–3 percentage points) from being in the lowest of five self-reported health categories. Copyright (C) 2009 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 19 (2010)
Issue (Month): 12 (December)
Pages: 1441-1460

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Handle: RePEc:wly:hlthec:v:19:y:2010:i:12:p:1441-1460
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