Risk Taking in the Household: Strategic Behavior, Social Preferences, or Interdependent Preferences?

85 Pages Posted: 27 Nov 2018 Last revised: 15 Feb 2020

See all articles by Christoph Engel

Christoph Engel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; University of Bonn - Faculty of Law & Economics; Erasmus University Rotterdam (EUR), Erasmus School of Law, Rotterdam Institute of Law and Economics, Students; Universität Osnabrück - Faculty of Law

Alexandra Fedorets

German Institute for Economic Research (DIW Berlin)

Olga Gorelkina

University of Liverpool - Management School (ULMS)

Date Written: February 14, 2020

Abstract

We test 494 households participating in the German Socio Economic Panel SOEP to examine risk taking by one household member that affects a second household member. Choices cannot be explained by (short term) strategic behavior. Respect for the risk preference of the counterpart is at best imperfect. Two findings suggest preference dependence: participants do not need explicit information about their counterpart’s choice to learn their risk preference. There are characteristic choice patterns not only at the individual, but also at the household level. To define these patterns, based on a theoretical model, we calculate individual risk aversion, sensitivity toward a bad outcome for the other household member, and the willingness to strike a balance between one’s own and the other’s risk preferences. Using machine learning methods, we find preference patterns, both at the individual and at the household level.

Keywords: interdependent risk preference, household, reticence to expose others to risk, trade-off between own and others’ risk preferences

JEL Classification: C45, D13, D81, D91

Suggested Citation

Engel, Christoph and Fedorets, Alexandra and Gorelkina, Olga, Risk Taking in the Household: Strategic Behavior, Social Preferences, or Interdependent Preferences? (February 14, 2020). MPI Collective Goods Discussion Paper, No. 2018/14, Available at SSRN: https://ssrn.com/abstract=3291331 or http://dx.doi.org/10.2139/ssrn.3291331

Christoph Engel (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

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University of Bonn - Faculty of Law & Economics

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Erasmus University Rotterdam (EUR), Erasmus School of Law, Rotterdam Institute of Law and Economics, Students ( email )

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Rotterdam
Netherlands

Universität Osnabrück - Faculty of Law

Osnabruck, D-49069
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Alexandra Fedorets

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Olga Gorelkina

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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