Decision-Making under Risk: From Individual Preferences to Couple Decisions (original) (raw)

Individual and couple decision behavior under risk: evidence on the dynamics of power balance

Theory and Decision, 2011

This paper reports results of an experiment designed to analyze the link between risky decisions made by couples, and risky decisions made separately by each spouse. We estimate both the individuals and the couples' degrees of risk aversion, and we analyze how the risk preferences of the two spouses aggregate when they have to perform joint decisions under risk. We show that the man has more decision power than the woman, but the woman's decision power increases when she has ultimate control over the joint decision.

The family under the microscope: an experiment testing economic models of household choice

2008

We devise and execute three experiments to test key features of models of household decision-making. Using established couples (married and unmarried) we test income pooling, unanimity and Pareto efficiency. Subjects make choices individually and jointly and are asked to make predictions about their partner's choices. Unanimity is rejected. Income pooling is not rejected in joint choice but has less explanatory power in individual choice. In direct tests both sexes do not pool income completely, but in econometric tests across all tasks, women place an equal weight on payoffs but men discount their partner's payoffs by between 15 and 20%. We find that transparency has little impact on deviations from income pooling or indeed on behaviour generally. Many joint choices deviate from the Pareto principle in a systematic manner suggesting that choices made as a couple are more risk averse than individual decisions. JEL Codes: C920, D130, D80.

Household Bargaining and Portfolio Choice

2008

Differences in risk preferences may lead to spouses having different preferences over the allocation of their household portfolio. This paper examines how their problem is resolved using a simple collective model of household portfolio choice. The model predicts that the risk aversion of the spouse with more bargaining power determines household portfolio allocation. The model also predicts that the share of risky assets in the household portfolio increases with wealth. Empirical support for the results is found using data from the Health and Retirement Study (HRS).

For Better or Worse: Financial Decision-Making Behavior of Married Couples?

SSRN Electronic Journal, 2000

This study constructs a theoretical model of household bargaining to explain the financial decision-making behavior of married couples. We empirically test our model using data from the 2000 Health and Retirement Study (HRS). The HRS is unique among national data sets in that it identifies the primary decision-maker and the more financially knowledgeable spouse. It also includes detailed information on the individual retirement accounts (IRAs) of both the husband and the wife. Using this information, we estimate a series of regression models to investigate how decision making and bargaining power affect whether a couple owns an IRA, how much they invest in it, and whether they allocate it to mostly stocks. In general, the results show that, when the husband has more decision-making power than the wife or the decision-making power is about equal, the couple is more likely to own an IRA and to have a larger amount invested in an IRA. Furthermore, the account is more likely to be allocated to mostly stocks when the husband is the financially knowledgeable spouse. Traditional measures of bargaining power also were significant in all of our models, even after we controlled for decision making. The findings have important implications for educators and financial practitioners and provide insight into the importance of having both the husband and wife actively involved in making financial decisions.

Saving, Risk Sharing, and Preferences for Risk

American Economic Review, 2004

Saving decisions are made jointly by household members who generally earn risky incomes. Consequently, to interpret saving patterns it is crucial to analyze the relationship between intrahousehold risk sharing and intertemporal choices. To that end in this paper the household is characterized as a group of agents with possibly heterogeneous preferences making efficient decisions. Two results are obtained. First, it is shown that risk sharing can increase the amount saved by the household. Second, I find that an increase in risk aversion and prudence of an individual member can reduce household risk aversion and prudence. These results are consistent with the empirical evidence collected using the HRS.

Cohabitation and Marriage in a Risky World

Review of Economics of the Household, 2004

Cohabiting and married couples are analysed in presence of income uncertainty and precautionary saving. Married couples have legal constraints on their relationship that force them to act cooperatively, while cohabitants are likely to act non-cooperatively. This makes risk sharing different for different couples; cohabitants share risk to a lesser extent than do married couples, and their savings decision is further distorted by strategic undersaving. The conclusion is therefore a kind of paradox, cohabitants who have abstained from marriage due to higher preferences for independence and equality are less equal than married couples, and they also act strategically to be able to increase assistance from their partner.

Over-investment in marriage-specific capital

Mathematical Social Sciences, 2014

We consider the decisions of a married couple in a risky environment. The distribution of spouses' bargaining power may change as a consequence of new outside opportunities that are o¤ered to them, so that individual consumption may ‡uctuate over time. This is what we call "bargaining risk". To reduce this risk, the spouses may decide to over-invest in marriage-speci…c capital (which, by de…nition, is completely lost in the case of divorce) and thereby limit the attractiveness of spouses'outside opportunities. This strategy is shown to be optimal. More suprisingly, over-investment in marriage-speci…c capital is still an optimal strategy when spouses are confronted to a (small) risk of divorce. This contrasts with the usual intuition.

Financial Risk Taking and Differential Bargaining Power Within the Household

Using survey data from a representative sample of Dutch households from 2002 to 2018, we examine whether inequality of amounts held in bank accounts within couples affects financial risk-taking. Using both ordinary least squares and panel data methods, we find that such inequality is associated with a reduced propensity to invest in stocks directly held and/or mutual funds. Specifically, an increase by 10 percentage points in the maximum share of bank account balances is associated with a drop in the probability to invest in risky financial assets by 1 percentage point. The results suggest that higher economic inequality between the two partners leads to a desire to de-risk the household’s financial portfolio. This in turn implies that in times of financial distress adverse economic outcomes that intensify within-household economic inequalities (such as job loss of one partner) could lead households to withdraw money from financial markets.