Presentation-correction
- 1. Childhood’s Economic Framwork and its Effects on Preferences Melika Liporace HEC Lausanne April 17, 2014 Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 1 / 16
- 2. Outline 1 Introduction 2 Data Risk Aversion Birth Date 3 Methodology Assumption Control Variables 4 Preliminary results Control Variables Significance 5 Conclusions Extensions Final words and debate Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 2 / 16
- 3. Introduction Introduction Main question: Does the economic framework of one’s childhood influences one’s risk aversion during later life? Motivation: HRS Data naturally offers a lot of information on effects of economic changes through history Risk Aversion is often ruled out as an heterogeneous feature, and not really analyzed Childhood’s Economic Framework can be seen almost as a random variable, reducing the risks of endogeneity often encountered in preferences and microbehavioral analysis Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 3 / 16
- 4. Data Risk Aversion Data: Risk Aversion Design Two questions are asked: Suppose that you are the only income earner in the family, and you have a good job guaranteed to give you your current (family) income every year for life. You are given the opportunity to take a new and equally 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 a third. 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 the new 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 then take the new job? Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 4 / 16
- 5. Data Risk Aversion Data: Risk Aversion Design 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: Two additionnal questions for Yes/Yes and No/No ⇒ two additional categories ⇒ ”rescale”: Wave 4 type 1 2 3 4 5 6 Wave 1 type 1 1 2 3 4 4 Question rephrased to avoid ”status-quo bias” Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 5 / 16
- 6. Data Risk Aversion Data: Risk Aversion Summary Stastics: relative frequencies Relative Freq. 1 12.60 2 10.26 3 13.60 4 63.55 Total 100.00 0204060 Percent 0 1 2 3 4 Risk Aversion Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 6 / 16
- 7. Data Risk Aversion Data: Risk Aversion Relevance Pros: Measured by a specific design as well adapted as possible No utility specification assumed Gamble over lifetime income (vs. usually, small bets) Barsky et al. (1997)1 found that ”The measured risk tolerance has predictive power for choices over risky behaviors - the decisions to smoke and drink, to buy insurance, to immigrate, to be self-employed, and to hold stock” Cons: Self-reported choices Hypothetical situations Status-quo bias Mitgated findings of Barsky et al.: ”the incremental predictive power of risk tolerance is never very high.” 1 Preference Paramters and Behavioral Heterogeneity: an Experimental Approach In Health and Retirment Study Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 7 / 16
- 8. Data Birth Date Data: Birth Date Summary Statistics: Frequency 0200400600800 Frequency 1900 1910 1920 1930 1940 1950 1960 1970 1980 Birth Date Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 8 / 16
- 9. Data Birth Date Data: Birth Date Economic 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 0.1325 World War II Dummy 5650 0.3468 Observations 16292 Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 9 / 16
- 10. Data Birth Date Data: Birth Date Economic 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
- 11. 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: Latent variable riskavers∗ = ecodummies β + zγ + ε Outcome riskavers ∈ (0; 4), as the usual function of y∗ Interested in partial effects of ecodummies (partially through β) Control variables z → which control variables ? Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 11 / 16
- 12. Methodology Control Variables Methodology: Control Variables Idea : find variables that: are correlated to individual’s birth date 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: risk aversion could be partly inherited through upbringing 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
- 13. Preliminary results Control Variables Preliminary results: Control Variables Mean Years of Education 12.60 Parent’s Education 10.33 Observations 14802 Control variables requirements : drops less than 2000 Risk aversion and Economic dummies distribution roughly stay the same ⇒ Not too demanding Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 13 / 16
- 14. 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 is significant Surprise parent’s education very significant education not significant at all ⇒ Should we collude both dummies in only one such as ”Before/after WWII”? Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 14 / 16
- 15. Conclusions Extensions Extensions Further analysis: Does the age at which one has encountered an economic crisis implies different effects on risk aversion? Is the effect stronger or weaker 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 forces of this change? Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 15 / 16
- 16. 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? Microeconometric Project Economic Framwork and Risk Aversion April 17, 2014 16 / 16