The Cross-Section of Household Preferences
Risk appetite and time preferences of Swedish households analyzed.
1Research Scope
This study estimates the cross-sectional distribution of Epstein-Zin preferences using the wealth and risky portfolio shares of Swedish households. The analysis of a large panel dataset reveals differences in individuals' financial decision-making patterns.
2Risk Appetite Findings
The research shows relatively modest heterogeneity in risk appetite among households. The standard deviation of risk aversion is 0.97 with a median of 7.50, indicating generally similar risk perceptions across the population.
3Diversity in Time Preferences
Meaningful heterogeneity was observed in time preference rate (TPR) and elasticity of intertemporal substitution (EIS) parameters. TPR showed a standard deviation of 7.31% (median 4.08%), while EIS had a standard deviation of 3.17 (median 0.70).
4Parameter Relationships
A very weak negative correlation was found between risk aversion and EIS. This suggests that individuals with higher risk tolerance typically adjust their consumption less over time.
5Demographic Differences
Households with riskier labor income showed lower risk aversion, while those entering the sample with low wealth had higher TPR and lower EIS. These findings provide important clues for understanding financial behavior backgrounds.
6Implications for Financial Planning
The results emphasize the need for personalized financial products and retirement plans. The heterogeneous preferences of households suggest that standard financial solutions may not be suitable for everyone.
Original article: Journal of Finance — Hanehalkı Tercihlerinin Çapraz Kesiti