Preference Parameters and Behavioral Heterogeneity:  
An Experimental Approach in the Health and Retirement Study

Robert Barksy
Tom Juster
Miles Kimball
Matt Shapiro

ABSTRACT

     Individuals' preferences underlying most economic behavior are
likely to display substantial heterogeneity.  This paper reports on
direct measures of preference parameters relating to risk tolerance,
time preference, and intertemporal substitution.  These experimental
measures are based on survey respondents' choices in hypothetical
situations.  The questions are constructed with as little departure
from the theorist's concept of the underlying parameters as possible.

     The individual measures of preference parameters display
substantial heterogeneity.  The majority of respondents fall into the
least risk-tolerant group, but a substantial minority displays higher
risk tolerance.  The individual measures of intertemporal substitution
and time preference also display substantial heterogeneity.  The mean
risk tolerance is 0.25; the mean elasticity of intertemporal
substitution is 0.2.  Estimated risk tolerance and the elasticity of
intertemporal substitution are essentially uncorrelated across
individuals.  

     Because the risk tolerance measure is obtained as part of the
main questionnaire of a large survey, it can be related to a wide
range of economic behaviors.  Measured risk tolerance is positively
related to a number of risky behaviors, including smoking, drinking,
failing to have insurance, and holding stocks rather than Treasury
bills.  These relationships are both statistically and quantitatively
significant, although measured risk tolerance explains only a small
fraction of the variation of the studied behaviors.  

     The findings leave the equity premium puzzle unresolved. 
Although most individuals are risk averse, there are enough risk
tolerant individuals to hold the outstanding supply of equity at far
less than the historically observed risk premium.