Who Exhibits Time Varying Risk Aversion?

Abstract

There is growing empirical evidence that risk preferences change based on financial market conditions. This paper explores individual predictors of time varying risk aversion among participants in U.S. defined contribution plans using a unique dataset with daily responses to a risk tolerance questionnaire. We find that older investors (ages 51-65) are more susceptible to time varying risk aversion. Among older investors, variable risk preference was greatest for participants with the smallest account balances and the lowest incomes, but was unrelated to equity allocation within their retirement portfolio. Much of the variation in the aggregate risk tolerance score can be attributed to variation in future long-term equity performance expectations among older investors. We discuss how target-date funds have the potential to reduce losses from poor market timing that may result from time varying risk aversion.