How General Are Risk Preference? Choices under Uncertainty in Different Domains

Liran Einav, Amy Finkelstein, Iuliana Pascu, Mark Cullen, MD

NBER Retirement Research Center Paper No. NB 10-12
Issued in September 2010

We examine the extent to which an individual' actual insurance and s investment choices display a stable ranking in willingness to bear risk, relative to his peers, across di¤erent contexts. We do so by examining the same individuals'decisions regarding their 401(k) asset allocations and their choices in five diverent 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 for example that one' choices in other insurance domains are subsstantially more predictive of one' choice in a given insurance domain than either one' s s detailed demographic characteristics or one' claims experience in that domain. Hows ever, we find considerably less predictive power between one' insurance choices and s the riskiness of one' 401(k) asset allocations, suggesting that the common element of s an individual' preferences may be stronger among domains that are “closer” in cons text. 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 largely consistent with an important domain-general component of risk preferences.

PDF (204 K)

Acknowledgments