Risk Tolerance and Alcohol Demand Among Adults and Older Adults

Abstract

This study has two primary goals. These are the examination of the effect of risk tolerance on individuals' demand for alcohol and second, the examination of the demand for alcohol by older adults over the age of 55. The data sets employed are multiple waves from the Panel Study of Income Dynamics (PSID) and the Health and Retirement Study (HRS). While risk tolerance can impact the level of alcohol consumption, it may also affect the sensitivity of demand to prices. There are parallels between the economist's and the psychologist's concept of risk tolerance. Research on attitudes towards risk by psychologists is part of a larger theoretical and empirical literature on personality traits. Psychologists have found risk tolerance to be an important determinant of alcohol consumption. The empirical results indicate that risk aversion has a significant negative effect on alcohol consumption, with the prevalence and consumption among risk-tolerant individuals being six to eight percent higher. Furthermore, the tax elasticity is similar across both risk-averse and risk-tolerant individuals. This suggests that tax policies may be effective in deterring alcohol consumption even among those who have a higher propensity for alcohol use. The significance of research on alcohol demand by individuals ages 55 and older is highlighted by the increased potential for alcohol-related adverse consequences among this demographic group. Comparing younger adults (ages 21-54) with older adults, responses to taxes and prices are higher among the older sub-population. The tax elasticity is estimated at -0.05 for younger adults, compared to -0.20 for older adults.