By Neil Murray, Levent Neyse and Carsten Schröder
Risk attitudes refer to an individual's inclination towards taking or avoiding risks. Some people may be more willing to take risks, while others may be more risk-averse. It is a fundamental concept in economics and decision-making research that helps explain how individuals make choices in situations where the outcomes are uncertain. As societies age, understanding how risk attitudes change over the life course becomes increasingly important for predicting economic outcomes such as job choice or saving strategies of demand for insurance. For instance, older people may become more risk-averse and therefore less likely to invest in high-risk stocks or start-ups and instead they may be more likely to choose low-risk assets, such as bonds or mutual funds.
Indeed, previous studies have found a consensus that risk aversion increases with age, but these studies often rely on measures of general risk attitudes that do not differentiate between specific situations or domains. For example, the willingness to risk one’s health by living an unhealthy lifestyle or playing a risky sport may be different from the willingness to take risks in the financial domain. Therefore, this study by BCCP Fellow Levent Neyse and co-authors Neil Murray and Carsten Schröder extends previous research by examining the risk-age profiles within five specific domains (financial, occupational, leisure, health, and trust) and for general risk attitudes.
Based on survey data from the Socio-Economic Panel, the authors find that the relationship between risk attitudes and age strongly depends on the underlying domain. For risk attitudes in the domains of finance, occupation, and leisure, the findings suggest that risk-taking declines significantly with age. However, in the areas of health, trust, and general risk, attitudes change little over the life course. In addition to the question of whether risk-taking changes with age, it is also important to examine how it changes. While the relationship follows a linear pattern in most domains, indicating a constant rate of change over time, there are two exceptions: In the leisure domain, there is a substantial decrease in risk-taking between the ages of 20 and 50 with almost no change thereafter, while general risk attitudes decrease slightly up to age 40 and then remain rather stable until they start to increase slightly again at age 60.
To better understand and quantify the impact of age on risk attitudes, the authors predict how shifting risk attitudes due to increasing age affects life outcomes such as investment in stocks or self-employment. It is found that due to changing risk attitudes in the financial domain, an increase in age by 10 years would reduce investments in stocks by 2.80% on average and that changing risk attitudes in the occupational domain would reduce self-employment by 5.73%. Repeating this analysis with general risk attitudes instead of domain-specific attitudes leads to a decrease of only 0.04% for investment in stocks and a decrease of 0.24% for self-employment. These contrasting outcomes highlight the importance of viewing risk attitudes as domain specific-otherwise, the results could be misleading.
This text is jointly published by BCCP News and BSE Insights.
The working paper can be found on this page.