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Childhood’s Economic Framworkand its Effects on Preferences
Melika Liporace
HEC Lausanne
April 17, 2014
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 1 / 16
Outline
1 Introduction
2 DataRisk AversionBirth Date
3 MethodologyAssumptionControl Variables
4 Preliminary resultsControl VariablesSignificance
5 ConclusionsExtensionsFinal words and debate
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 2 / 16
Introduction
Introduction
Main question:Does the economic framework of one’s childhood influences one’srisk aversion during later life?
Motivation:
HRS Data naturally offers a lot of information on effects of economicchanges through history
Risk Aversion is often ruled out as an heterogeneous feature, and notreally analyzed
Childhood’s Economic Framework can be seen almost as a randomvariable, reducing the risks of endogeneity often encountered inpreferences and microbehavioral analysis
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 3 / 16
Data Risk Aversion
Data: Risk AversionDesign
Two questions are asked:
Suppose that you are the only income earner in the family, and youhave a good job guaranteed to give you your current (family) incomeevery year for life. You are given the opportunity to take a new andequally good job, with a 50-50 chance it will double your (family)income and a 50-50 chance that it will cut your (family) income by athird. Would you take the new job?
Yes: Suppose the chances were 50-50 that it would double your (family)income, and 50-50 that it would cut it in half. Would you still take thenew job?
No: Suppose the chances were 50-50 that it would double your (family)income and 50-50 that it would cut it by 20 percent. Would you thentake the new job?
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 4 / 16
Data Risk Aversion
Data: Risk AversionDesign
4 categories:
Risk Aversion Type Answer Q1 Answer Q2
I Yes Yes (2a)II Yes No (2a)III No Yes (2b)IV No No (2b)
Issue: from Wave 4 and forward:I Two additionnal questions for Yes/Yes and No/No ⇒ two additional
categories ⇒ ”rescale”:
Wave 4 type 1 2 3 4 5 6Wave 1 type 1 1 2 3 4 4
I Question rephrased to avoid ”status-quo bias”
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 5 / 16
Data Risk Aversion
Data: Risk AversionSummary Stastics: relative frequencies
Relative Freq.
1 12.602 10.263 13.604 63.55Total 100.00
020
4060
Perc
ent
0 1 2 3 4Risk Aversion
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 6 / 16
Data Risk Aversion
Data: Risk AversionRelevance
Pros:I Measured by a specific design as well adapted as possibleI No utility specification assumedI Gamble over lifetime income (vs. usually, small bets)I Barsky et al. (1997)1 found that ”The measured risk tolerance has
predictive power for choices over risky behaviors - the decisions tosmoke and drink, to buy insurance, to immigrate, to be self-employed,and to hold stock”
Cons:I Self-reported choicesI Hypothetical situationsI Status-quo biasI Mitgated findings of Barsky et al.: ”the incremental predictive power of
risk tolerance is never very high.”
1Preference Paramters and Behavioral Heterogeneity: an Experimental Approach In Health and Retirment Study
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 7 / 16
Data Birth Date
Data: Birth DateSummary Statistics: Frequency
020
040
060
080
0Fr
eque
ncy
1900 1910 1920 1930 1940 1950 1960 1970 1980Birth Date
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 8 / 16
Data Birth Date
Data: Birth DateEconomic era: dummies
3 main economic periods
Great Depression (1929-1939)
World War II (1939-1945)
After War, Baby-boomers (after 1945)
Rule: Period’s dummy is 1 if: at least 10-year-old at the end of the period
Frequency % of pop.
Great Depression Dummy 2158 0.1325World War II Dummy 5650 0.3468
Observations 16292
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 9 / 16
Data Birth Date
Data: Birth DateEconomic era: dummies
Possible issues with data:
Small sample: ”Few” people in the Great Depression category
Sample selection: Individuals survived because more risk averse
Note:
Base group: Babyboomers(actually means have known neither period)
Caution with WWII dummy(actually means have not known Great Depression)
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 10 / 16
Methodology Assumption
Methodology: Assumption and Specification
Main assumption: Risk Aversion is time invariant:
Preferences are shaped during childhood and do not change after that.
⇒ Age per se should have no influence on it⇒ Age influences risk aversion only through the economic history⇒ Same reasoning for almost every other potential control variables
Then (and only then): almost no risk of endogeneity
Model: ordered probit (logit), with:I Latent variable riskavers∗ = ecodummies β + zγ + εI Outcome riskavers ∈ (0; 4), as the usual function of y∗
I Interested in partial effects of ecodummies (partially through β)I Control variables z
→ which control variables ?
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 11 / 16
Methodology Control Variables
Methodology: Control Variables
Idea : find variables that:I are correlated to individual’s birth dateI influence risk aversion (through other channels than economic past)
Two main candidates:
Education:Birth date changes access and average education, which shapes risk aversion.
(Arbitrary variable choice: years of education)
Parent’s education:I risk aversion could be partly inherited through upbringingI parent’s education could be a (largely imperfect) proxy of parent’s
income, therefore the encountered effect of economic crisis
(Only available variable: level of education)
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 12 / 16
Preliminary results Control Variables
Preliminary results: Control Variables
Mean
Years of Education 12.60Parent’s Education 10.33
Observations 14802
Control variables requirements :drops less than 2000
Risk aversion and Economicdummies distribution roughlystay the same
⇒ Not too demanding
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 13 / 16
Preliminary results Significance
Preliminary results: Significance
Table 1: Basic Ordered Probit Model
Risk
Great Depression Dummy 0.0533(0.0367)
World War II Dummy 0.0982∗∗∗
(0.0253)
Parent’s education -0.00109(0.00392)
Years of Education -0.0164∗∗∗
(0.00320)
Standard errors in parentheses∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
In economic dummies:only WWII dummy issignificant
SurpriseI parent’s education very
significantI education not
significant at all
⇒ Should we collude bothdummies in only one suchas ”Before/after WWII”?
Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 14 / 16
Conclusions Extensions
Extensions
Further analysis:
Does the age at which one has encountered an economic crisisimplies different effects on risk aversion? Is the effect stronger orweaker when one faces it once a grown-up?
Less restrictive (and more challenging) approach:
Does risk aversion changes over life? If so, what are the driving forcesof this change?
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Conclusions Final words and debate
Final words and debate
Risk aversion mesurement
→ accurate? Should we really use it?
Arguable assumption
→ credible? What do you think?
Few control variables
→ add some? Suggestions?
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