The Academy of Financial Services 35th Annual Meeting

Risk Preference, Education, Genetic Information, Endogenous Risk Preference

This study examines an assumption frequently invoked in economic models that individuals form preferences early, including with respect to risk, and those preferences remain stable. The study first develops a theoretical framework providing a possibility for the endogenous risk preference. In the empirical analysis, the study first uses comparison of risk preference between twins to explore the possibility of unstable risk preference. The study then uses education as the proxy of experience and tests the hypothesis that risk preferences vary systematically (and causally) with differences in education. To distinguish the genetic effect from the environmental effect of education, a mediation analysis is conducted. An instrumental variable design is adopted to address the endogeneity between risk preference and education.