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Americans Inconsistent on Financial Risk

A new paper in the American Economic Review (abstract; PDF), summarized here, finds that Americans aren’t very consistent when thinking about financial risk. Liran Einav, Amy Finkelstein, Iuliana Pascu, and Mark R. Cullen analyzed how people choose health insurance and 401(k) plans and found that “at most 30 percent of us make consistent decisions about financial risk across a variety of areas.”  Their data set includes 13,000 Alcoa employees:

Because employees were making decisions in both the health-care and retirement domains, the researchers had the opportunity to see how the same individuals handled different types of choices. Or, as Finkelstein puts it, the economists could ask: “Does someone who’s willing to pay extra money to get comprehensive health insurance, who doesn’t seem willing to bear much financial exposure in a medical domain, also tend to be the one who, relative to their peers, invests more of their 401(k) in [safer] bonds rather than stocks?”

“I think you could look at these results legitimately through two very different lenses,” Finkelstein explains. “You could say, if 30 percent of our sample is making consistent choices across all six domains, that suggests there is a fair amount of generality in people’s risk preferences, and the classical model has some bite. Or you could say, if just 30 percent of people are making choices that are consistent across domains, there are a lot of context-specific risk preferences.”  

(HT: The Big Picture)