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Health shocks and risk aversion
Simon Decker1, Hendrik Schmitz2
1University of Duisburg-Essen, Germany; CINCH Health Economics Research Center, Germany; Ruhr Graduate School in Economics (RGS Econ), Germany.
Journal of Health Economics
|October 30, 2016
Summary
A health shock significantly increases an individual's risk aversion, a change that persists for years. This finding suggests health impacts financial decision-making beyond income effects.
Area of Science:
- Health Economics
- Behavioral Economics
- Risk Management
Background:
- Individual risk aversion is a key determinant of financial and economic decisions.
- Risk preferences are often assumed to be stable over time.
- The impact of health shocks on risk aversion remains under-explored.
Purpose of the Study:
- To empirically investigate the causal effect of a health shock on individual risk aversion.
- To determine if health shocks alter established risk preferences.
- To explore the persistence and potential drivers of changes in risk aversion post-health shock.
Main Methods:
- Utilized grip strength as an objective indicator of health shocks.
- Employed regression-adjusted matching to address data non-randomness.
- Conducted sensitivity analyses to confirm the robustness of findings.
Main Results:
- A significant health shock was found to increase individual risk aversion.
- This effect on risk aversion was observed to persist for at least four years.
- Observed changes in risk aversion were not primarily driven by income fluctuations.
Conclusions:
- Health shocks demonstrably alter individual risk aversion, challenging the assumption of constant risk preferences.
- The impact of health on financial decision-making extends beyond direct economic consequences.
- Findings have implications for financial planning, insurance, and public health interventions.
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