physorg | In economics, classical
theory holds that we have consistent risk preferences, regardless of the
precise decision, from investments to insurance programs and retirement
plans. But studies in behavioral economics indicate that people's
choices can vary greatly depending on the subject matter and
circumstances of each decision.
Now a new paper (PDF) co-authored by an MIT economist brings a large
dose of empirical data to the problem, by looking at the way tens of
thousands of Americans have handled risk in selecting health insurance
and retirement plans. The study, just published in the American Economic
Review, finds that at most 30 percent of us make consistent decisions
about financial risk across a variety of areas.
This empirical finding belies the notion that people are uniformly
consistent in their approach to risk, across types of financial
decisions—but it also shows that not everyone continually changes their
risk tolerance, either.
"As economists, we often place great value on where people put their
money in the real world," says Amy Finkelstein, the Ford Professor of
Economics at MIT, who helped conduct the research. "Most extremes are
not true in the reality, and we found our answer was in the middle."
