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  5. Are Risk Preferences Stable?

Are Risk Preferences Stable?

  • Hannah Schildberg-Hörisch
Journal of Economic Perspectives
vol. 32, no. 2, Spring 2018
(pp. 135-54)
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Abstract

It is ultimately an empirical question whether risk preferences are stable over time. The evidence comes from diverse strands of literature, covering the stability of risk preferences in panel data over shorter periods of time, life-cycle dynamics in risk preferences, the possibly long-lasting effects of exogenous shocks on risk preferences as well as temporary variations in risk preferences. Individual risk preferences appear to be persistent and moderately stable over time, but their degree of stability is too low to be reconciled with the assumption of perfect stability in neoclassical economic theory. We offer an alternative conceptual framework for preference stability that builds on research regarding the stability of personality traits in psychology. The definition of stability used in psychology implies high levels of rank-order stability across individuals and not that the individual will maintain the same level of a trait over time. Preference parameters are considered as distributions with a mean that is significantly but less than perfectly stable, plus some systematic variance. This framework accommodates evidence on systematic changes in risk preferences over the life cycle, due to exogenous shocks such as economic crises or natural catastrophes, and due to temporary changes in self-control resources, emotions, or stress. We note that research on the stability of (risk) preferences is conceptually at the heart of microeconomics and systematic changes in risk preferences have vital real-world consequences.

Citation

Schildberg-Hörisch, Hannah. 2018. "Are Risk Preferences Stable?" Journal of Economic Perspectives, 32 (2): 135-54. DOI: 10.1257/jep.32.2.135

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • D12 Consumer Economics: Empirical Analysis
  • D15 Intertemporal Household Choice; Life Cycle Models and Saving
  • D81 Criteria for Decision-Making under Risk and Uncertainty
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