Household Finances and Attitudes towards Risk
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KeywordsWe explore the relationship between risk preference and household finances; namely the level of unsecured debt and saving at the household level; within the context of a two period theoretical framework; which predicts that debt and saving are functions of risk aversion. We test the predictions of our theoretical framework for a sample of households drawn from the U.S. Panel Study of Income Dynamics (PSID). Using a sequence of questions from the 1996 PSID; we construct a measure of risk preference allowing us to explore the implications of interpersonal differences in risk preference for whether households hold unsecured debt and/or savings as well as exploring the relationship between risk preference and the accumulation of unsecured debt and savings at the household level. Our empirical findings suggest that risk preference is an important determinant of the level of unsecured debt acquired at the household level with risk aversion serving to reduce the level of unsecured debt accumulated by households; whilst risk preference does not appear to influence the level of financial assets at the household level.;
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
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