Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey

69 Pages Posted: 20 Sep 2000

See all articles by Robert Barsky

Robert Barsky

Research Department, Federal Reserve Bank of Chicago; University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

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)

F. Thomas Juster

University of Michigan at Ann Arbor - Institute for Social Research (ISR)

Matthew D. Shapiro

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

Date Written: August 1995

Abstract

Individuals' preferences underlying most economic behavior are likely to display substantial heterogeneity. This paper reports on direct measures of preference parameters relating to risk tolerance, time preference, and intertemporal substitution. These experimental measures are based on survey respondents' choices in hypothetical situations. The questions are constructed with as little departure from the theorist's concept of the underlying parameter as possible. The individual measures of preference parameters display substantial heterogeneity. The majority of respondents fall into the least risk-tolerant group, but a substantial minority display higher risk tolerance. The individual measures of intertemporal substitution and time preference also display substantial heterogeneity. The mean risk tolerance is 0.25; the mean elasticity of intertemporal substitution is 0.2. Estimated risk tolerance and the elasticity of intertemporal substitution are essentially uncorrelated across individuals. Because the risk tolerance measure is obtained as part of the main questionnaire of a large survey, it can be related to a number of economic behaviors. Measured risk tolerance is positively related to a number of risky behaviors, including smoking, drinking, failing to have insurance, and holding stocks rather than Treasury bills. Although measured risk tolerance explains only a small fraction of the variation of the studied behaviors, these estimates provide evidence about the validity and usefulness of the measures of preference parameters.

Suggested Citation

Barsky, Robert B. and Kimball, Miles S. and Juster, F. Thomas and Shapiro, Matthew D., Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey (August 1995). NBER Working Paper No. w5213. Available at SSRN: https://ssrn.com/abstract=225277

Robert B. Barsky (Contact Author)

Research Department, Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
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University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
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734-764-9476 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Miles S. Kimball

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

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2375 (Phone)
734-764-2769 (Fax)

University of Colorado Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States
303.492.8295 (Phone)
303.492.8960 (Fax)

HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

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United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

F. Thomas Juster

University of Michigan at Ann Arbor - Institute for Social Research (ISR)

Ann Arbor, MI 48106-1248
United States

Matthew D. Shapiro

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

and Survey Research Center
611 Tappan Street
Ann Arbor, MI 48109-1220
United States
313-764-5419 (Phone)
313-764-2769 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
313-764-5419 (Phone)
313-764-2769 (Fax)

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