1. 1/1 Individual Risk Attitudes New Evidence from a Large, Representative, Experimentally-Validated Survey Thomas Dohmen, Armin Falk, David Huffman, Uwe Sunde (IZA and University of Bonn) Jürgen Schupp, Gert G. Wagner (DIW, Berlin, and IZA, Bonn) Oxford, July 2006

2. 2/1 Motivation Risk and uncertainty are pervasive in economic life. As a consequence, individual attitudes towards risk play a central role in economic theory. Predicted to have a decisive impact on almost every important economic decision. The aim of this paper is to improve understanding and measurement of individual risk attitudes.

3. 3/1 Research questions Do risk attitudes vary across individuals? What are the determinants of individual differences? Are hypothetical measures of risk attitudes reliable predictors of actual risky behavior? What is the impact of context on willingness to take risks? Is there a single underlying preference that determines risk-taking in all contexts? How does the impact of personal characteristics vary with context? Can survey questions incorporating situation- appropriate context outperform standard lottery measures of risk preference?

4. 4/1 Data Large, representative sample: 22,019 individuals. 2004 Wave of the Socioeconomic Panel (SOEP) Extensive socio-demographic information. New survey measures. New survey measures. Complementary field experiment: 450 individuals. Subjects answer same survey measures as in SOEP. Also make risky choices for real money.

5. 5/1 Survey Measures General Risk Question How do you see yourself: Are you generally a person who is fully prepared to take risks or do you try to avoid taking risks? Please tick a box on the scale, where the value 0 means: unwilling to take risks and the value 10 means: fully prepared to take risks. 11-point response scale: completely unwilling to completely willing. Open-ended: Respondent free to think about curvature of utility,but also imagine stakes and probabilities involved in taking risks. Context Questions Same scale, but ask about: Car driving, health, financial matters, sports and leisure, career. Hypothetical Investment Question Willingness to invest in a realistic investment opportunity, with explicit stakes and probabilities. Holds beliefs constant, measures risk preference.

6. 6/1 Outline of the talk Distribution of risk attitudes. Determinants. Does the survey measure predict behavior? Alternative measure of risk preference. Impact of context on risk attitudes. Compare predictive power of different measures. Evidence on occupational sorting and regional mobility. Intergenerational transmission of risk attitudes and assortative mating.

7. 7/1 Heterogeneity and Determinants General Risk Question

8. 8/1 Distribution of Willingness to Take Risks

9. 9/1 Gender and Willingness to Take Risks

10. 10/1 Age and Willingness to Take Risks

11. 11/1 Age and Willingness to Take Risks

12. 12/1 Parental Ed. and Willingness to Take Risks

13. 13/1 Height and Willingness to Take Risks

14. 14/1 Height and Willingness to Take Risks

15. 15/1 Determinants of Risk Attitudes (Probit)

16. 16/1 Determinants of Risk Attitudes (Probit)

17. 17/1 Determinants of Risk Attitudes (Probit)

18. 18/1 Can Survey Questions Predict Behavior?

19. 19/1 Experimental Design 450 subjects. Representative sample of adult population in Germany. Subjects answer the general risk question. Subjects also make 20 choices for real money Each choice is between a lottery and a safe option: Lottery: 300 Euros or 0 Euros, with equal probability. Safe option: X Euros for sure, where X varies across choices. X=0 in first choice, increases to 190 in 20th choice (by 10S) One choice is randomly selected and implemented. Measure of risk taking: how high does X have to be, to induce a switch from the lottery to the safe option?

20. 20/1 Lottery Choices and Survey Answers

21. 21/1 Validation of Survey Risk Measure

22. 22/1 Alternative Measure of Risk Attitudes

23. 23/1 Survey measure Hypothetical Investment Scenario Choose how much of 100,000 Euros to invest in a hypothetical asset. doubles the investment, or returns half, with equal probability. Possible amounts: 0, 20K, 40K, 60K, 80K, 100K Holds beliefs constant across individuals. Differences can be attributed to differences in curvatures of utility. Incorporates context of real financial decision.

24. 24/1 Investment in Hypothetical Asset

25. 25/1 Determinants of Investment (Probit)

26. 26/1 Determinants of Investment (Probit)

27. 27/1 Determinants of Investment (Probit)

28. 28/1 CRRA Coefficients (interior responses)

29. 29/1 General Risk Attitude and CRRA Coeff.

30. 30/1 Context and Risk Attitudes

31. 31/1 Correlation of Risk Attitudes Across Domains

32. 32/1 Determinants in Different Contexts Do the exogenous factors have the same impact across domains?

33. 33/1 Determinants in Different Contexts Do the exogenous factors have the same impact across domains? Gender, Age, Parental Education, and Height Affect risk attitudes in most domains. Effects are qualitatively similar to general risk. But magnitudes differ across domains, e.g. gender matters more in driving than in financial matters.

34. 34/1 Primary Determinants of Risk Attitudes

35. 35/1 Comparing Predictive Power of Alternative Measures Within and Across Contexts

36. 36/1 Predicting Behavior in Different Contexts Regress behavioral outcomes sequentially on each risk measure separately. General risk, 5 domain-specific, and hypothetical investment choice. Behavioral outcomes span the five contexts identified in the SOEP Real-world portfolio choice, participation in sports, occupational choice, smoking, migration, life satisfaction, traffic violations. Compare predictive power of different measures, within and across contexts.

37. 37/1 Determinants of Behavior in Different Domains

38. 38/1 Determinants of Behavior in Different Domains

39. 39/1 Traffic Offenses and Willingness to Take Risks

40. 40/1 Traffic Offenses and Willingness to Take Risks

41. 41/1 Comparing Predictive Power Most measures predict behavior across several contexts. Suggestive of a single risk trait. Provides additional evidence that the measures are behaviorally relevant. However, best predictor of behavior in a given context is always corresponding domain-specific question. Measure of risk attitudes should incorporate situation- specific context, in order to predict specific behavior. E.g. ask about willingness to take risks in health matters, in order to predict risky health behaviors, rather than using a measure of willingness to take risks in financial matters.

42. 42/1 Conclusions

43. 43/1 Conclusions Self-reported willingness to take risks varies across individuals. Exogenous factors explain individual differences: Women and older individuals are more cautious. Children of highly-educated parents and taller individuals take more risks. Survey measures are behaviorally relevant: predict actual risk-taking behavior in a field experiment.

44. 44/1 Conclusions Heterogeneity at least partly driven by differences in risk preferences, rather than subjective beliefs. Exogenous factors affect risk preferences in a similar way across domains, but magnitude varies. CRRA coefficients consistent with range typically assumed in economic models.

45. 45/1 Conclusions Risk attitudes are strongly but imperfectly correlated across contexts. All survey measures predict across several contexts. But best predictor of behavior in a specific context is a question framed in terms of that context.

46. 46/1 Additional Material

47. 47/1 Occupational Earnings Risk

48. 48/1 Risk Attitudes and Occupational Sorting

49. 49/1 Risk Attitudes and Regional Mobility in Germany

50. 50/1 Static Regressions, Ever Moved in 2000-2004

51. 51/1 Intergenerational Transmission of Risk Attitudes

52. 52/1 Significant determinants of risk attitudes: Gender, Age, Height

53. 53/1

54. 54/1 Specificity of transmission process Do parents pass on a relatively general, unspecific disposition towards risk? Or do they pass on a bundle of distinct risk attitudes? Each domain regressed simultaneously on all domains If transmission is distinct: diagonal should be most important

55. 55/1

56. 56/1 Positive Assortative Mating in Risk Attitudes

57. 57/1 Assortative mating Assortative mating reinforces strength and importance of intergenerational transmission Similarity of partners preferences? Less conflict in bargaining, better coordination, agency perspective Partners tend to be similar Age, social background, physical attractiveness or height but also behaviors (e.g., smoking, leisure activities) Similarity in outcomes and behavior affected by preference sorting in the marriage market

58. 58/1 Assortative mating: risk attitudes

59. 59/1 Robustness checks on restricted samples

60. 60/1 Subjects Responses to General Risk Question

61. 61/1 Distribution of Lottery Choices