Imputing Risk Tolerance from Survey Responses
35 Pages Posted: 24 Aug 2007 Last revised: 23 Oct 2007
Date Written: August 2007
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.
Suggested Citation: Suggested Citation