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How General Are Risk Preferences?

Jan 2010
Working Paper
09-005
By  Mark Cullen, Liran Einav, Amy Finkelstein, Iuliana Pascu
We examine the extent to which an individual's actual insurance and investment choices display a stable ranking in willingness to bear risk, relative to his peers, across different contexts. We do so by examining the same individuals' decisions regarding their 401(k) asset allocations and their choices in five different employer- provided insurance domains, including health and disability insurance. We reject the null that there is no domain-general component of preferences. Among the five insurance domains, the magnitude of the domain-general component of preferences appears substantial; we find for example that one's choices in other insurance domains are substantially more predictive of one's choice in a given insurance domain than either one's detailed demographic characteristics or one's claims experience in that domain. However, we find considerably less predictive power between one's insurance choices and the riskiness of one's 401(k) asset allocations, suggesting that the common element of an individual's preferences may be stronger among domains that are closer in context. We also find that the relationship between insurance and investment choices appears considerably larger for employees who may be associated with better financial sophistication. Overall, we view our findings as largely consistent with an important domain-general component of risk preferences.