Risk Taking in the Household: Strategic Behavior, Social Preferences, or Interdependent Preferences?
85 Pages Posted: 27 Nov 2018 Last revised: 15 Feb 2020
Date Written: February 14, 2020
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: Suggested Citation