How general are risk preferences? Choices under uncertainty in different domains.
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 for example that one's choices in other insurance domains are substantially 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 largely consistent with an important domain-general component of risk preferences.
We are grateful to Felicia Bayer, Brenda Barlek, Chance Cassidy, Fran Filpovits, Frank Patrick, and Mike Williams for innumerable conversations explaining the institutional environment of Alcoa, to Colleen Barry, Susan Busch, Linda Cantley, Deron Galusha, James Hill, Sally Vegso, and especially John Beshears, Brigitte Madrian, and Marty Slade, for providing and explaining the data, to Marika Cabral, Tatyana Deryugina, Sean Klein, and James Wang for outstanding research assistance, and to Levon Barseghyan, David Laibson, Dan Silverman, and Jon Skinner for helpful comments. The data were provided as part of an ongoing service and research agreement between Alcoa, Inc. and Stanford, under which Stanford faculty, in collaboration with faculty and staff at Yale University, perform jointly agreed-upon ongoing and ad-hoc research projects on workers' health, injury, disability and health care, and Mark Cullen serves as Senior Medical Advisor for Alcoa, Inc. We gratefully acknowledge support from the NIA (R01 AG032449), the National Science Foundation grant #SES-0643037 (Einav), the Alfred P. Sloan Foundation (Finkelstein), and the John D. and Catherine T. MacArthur Foundation Network on Socioeconomic Status and Health, and Alcoa, Inc. (Cullen). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
How General Are Risk Preferences? Choices under Uncertainty in Different Domains, with Amy Finkelstein, Iuliana Pascu, and Mark Cullen American Economic Review, 102(6), October 2012, 2606-2638 citation courtesy of