Wednesday, December 12, 2012

these humans are comically inconsistent

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."

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