Abstract
We conduct a detailed examination of the psychometric and empirical properties of some commonly used survey-based measures of risk preferences in a population-based sample of 11,000 twins. Using a model that provides a general framework for making inferences about the component of measured risk attitudes that is not due to measurement error, we show the measurement-error adjustment leads to substantially larger estimates of the predictive power of risk attitudes, of the size of the gender gap, and of the magnitude of the sibling correlation. Risk attitudes are predictive of investment decisions, entrepreneurship, and health behaviors such as smoking and drinking, are robustly associated with cognitive ability and personality, and our estimates are often larger than those in the literature. One implication of our results is that the small amounts of variation that the risk measures have previously been reported to explain are in part artifacts of imperfect measurement.
Highlights
Preference heterogeneity is a possible explanation for some of the individual-level variation observed in economic behaviors, such as labor supply, saving and consumption decisions, and asset allocation
Researchers should try to obtain empirical measures of the fundamental dimensions of heterogeneity using surveys or experiments. Such direct measurement of preferences, sometimes coupled with the assumption that they are stable functions of some observable states of nature, is a way of disciplining preference-based explanations and avoiding the problem of ad hoc theorizing that concerned Stigler and Becker. Proponents of this approach argue for the integration of individual-difference psychology into economics (Almlund et al 2011; Becker et al 2012; Ferguson et al 2011; Borghans et al 2008) and for a sustained effort to learn more about the properties of the measures of preferences that are commonly used in economic research
Population-based sample of 11,000 twins with data on risk attitudes and important behavioral outcomes and made several contributions to the effort to learn more about some measures of risk preferences that are commonly used in economic research
Summary
Preference heterogeneity is a possible explanation for some of the individual-level variation observed in economic behaviors, such as labor supply, saving and consumption decisions, and asset allocation. Researchers should try to obtain empirical measures of the fundamental dimensions of heterogeneity using surveys or experiments Such direct measurement of preferences, sometimes coupled with the assumption that they are stable functions of some observable states of nature, is a way of disciplining preference-based explanations and avoiding the problem of ad hoc theorizing that concerned Stigler and Becker. The estimated correlation between behavioral inhibition and risk attitudes increases by about 50% after adjustment for measurement error, and the adjusted estimate of 0.45 is substantially higher than previously reported correlations between risk attitudes and personality traits (Becker et al 2012; Dohmen et al 2010; Lonnqvist et al 2014). We provide a brief overview of the variables we use in this paper and present summary statistics for our sample; we provide additional details on the variables and data in the Online Appendix
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