Imputing risk tolerance from survey responses
By: Miles S. Kimball, Claudia R. Sahm, Matthew D. Shapiro.
Contributors: Sahm, Claudia R.; Shapiro, Matthew D.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 13337.; Working paper series (National Bureau of Economic Research) -- working paper no. 13337.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 33
Subjects: Income -- United States; Risk -- Economic aspects -- Mathematical models
Description: Economic theory assigns a central role to risk preferences. This paper develops a measure of relative risk tolerance using responses to hypothetical income gambles in the Health and Retirement Study. In contrast to most survey measures that produce an ordinal metric, this paper shows how to construct a cardinal proxy for the risk tolerance of each survey respondent. The paper also shows how to account for measurement error in estimating this proxy and how to obtain consistent regression estimates despite the measurement error. The risk tolerance proxy is shown to explain differences in asset allocation across households.
Notes: Includes bibliographical references (p. 25).