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Are Risk Attitudes Fixed Factors or Fleeting Feelings?

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  • Cho, In Soo

Abstract

We investigate the stability of measured risk attitudes over time, using a 13-year longitudinal sample of individuals in the NLSY79. We find that an individual's risk aversion changes systematically in response to personal economic circumstances. Risk aversion increases with lengthening spells of employment and time out of labor force, and decreases with lengthening unemployment spells. However, the most important result is that the majority of the variation in risk aversion is due to changes in measured individual tastes over time and not to variation across individuals. These findings that measured risk preferences are endogenous and subject to substantial measurement errors suggest caution in interpreting coefficients in models relying on contemporaneous, one-time measures of risk preferences.

Suggested Citation

  • Cho, In Soo, 2013. "Are Risk Attitudes Fixed Factors or Fleeting Feelings?," Staff General Research Papers Archive 35751, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:35751
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    File URL: http://www2.econ.iastate.edu/papers/p15751-2013-01-10.pdf
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    risk aversion; stability; variance decomposition; within; measurement error; between; fixed effects;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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