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

  • 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)

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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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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