Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study

TLDR

The study derives preference parameters from survey responses to hypothetical scenarios based on economic theory. The analysis reveals substantial heterogeneity in risk tolerance, time preference, and intertemporal substitution, with risk tolerance uncorrelated with elasticity of intertemporal substitution and positively associated with risky behaviors, though it accounts for only a modest share of behavioral variation.

Abstract

This paper reports measures of preference parameters relating to risk tolerance, time preference, and intertemporal substitution. These measures are based on survey responses to hypothetical situations constructed using an economic theorist's concept of the underlying parameters. The individual measures of preference parameters display heterogeneity. Estimated risk tolerance and the elasticity of intertemporal substitution are essentially uncorrelated across individuals. Measured risk tolerance is positively related to risky behaviors, including smoking, drinking, failing to have insurance, and holding stocks rather than Treasury bills. These relationships are both statistically and quantitatively significant, although measured risk tolerance explains only a small fraction of the variation of the studied behaviors.