Imputing Risk Tolerance from Survey Responses

35 Pages Posted: 24 Aug 2007 Last revised: 23 Oct 2007

See all articles by Miles S. Kimball

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Claudia Sahm

Federal Reserve Board

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2007

Abstract

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

Kimball, Miles S. and Sahm, Claudia and Shapiro, Matthew D., Imputing Risk Tolerance from Survey Responses (August 2007). NBER Working Paper No. w13337. Available at SSRN: https://ssrn.com/abstract=1008829

Miles S. Kimball (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

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Claudia Sahm

Federal Reserve Board ( email )

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Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
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National Bureau of Economic Research (NBER) ( email )

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