On the Stability of Preferences: Repercussions of Entrepreneurship on Risk Attitudes

29 Pages Posted: 9 Jul 2014

See all articles by Matthias Brachert

Matthias Brachert

Halle Institute for Economic Research

Walter Hyll

Halle Institute for Economic Research

Date Written: June 2014

Abstract

The majority of empirical studies make use of the assumption of stable preferences in searching for a relationship between risk attitude and the decision to become and stay an entrepreneur. Yet empirical evidence on this relationship is limited. In this paper, we show that entry into entrepreneurship itself plays a decisive role in shaping risk preferences. We find that becoming self-employed is indeed associated with a relative increase in risk attitudes, an increase that is quantitatively large and significant even after controlling for individual characteristics, different employment status, and duration of entrepreneurship. The findings suggest that studies assuming that risk attitudes are stable over time suffer from reverse causality; risk attitudes do not remain stable over time, and individual preferences change endogenously.

Keywords: Endogenous preferences, Risk attitudes, Entrepreneurship, German Socio-Economic Panel

JEL Classification: D03, D81, M13

Suggested Citation

Brachert, Matthias and Hyll, Walter, On the Stability of Preferences: Repercussions of Entrepreneurship on Risk Attitudes (June 2014). SOEPpaper No. 667. Available at SSRN: https://ssrn.com/abstract=2463218 or http://dx.doi.org/10.2139/ssrn.2463218

Matthias Brachert (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Walter Hyll

Halle Institute for Economic Research ( email )

Kleine Maerkerstrasse 8

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