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Individual Risk Aversion Through the Life Cycle

I develop a dynamic model of individual lifetime behavior and jointly estimate a set of correlated dynamic equations for observed risk aversion, wealth-related decisions (employment, occupation, investment, and savings), and other characteristics that an individual may value independently of wealth (family and health). I consider how to incorporate observed measures of individual risk aversion (calculated from survey responses) into an empirical model and how to reconcile the use of these observed measures with the economic theory of individual behavior over time. I allow risk preferences to be an endogenous determinant of observed behaviors, and I find that the joint estimation of observed risk aversion and behaviors reduces the bias on the estimated marginal effects of policy variables and better approximate the distribution of individual unobserved heterogeneity. The estimated model is used to analyze investment policies associated with wealth accumulation in the Chilean private retirement system. I propose alternative time-varying default investment schemes showing that, over seven years, slightly riskier investment strategies may increase individual asset accumulation by eight percent or more; and that increases in mandatory contribution rates by three and five percent increase asset accumulation of 10 and 16 percent, respectively.


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