The Effects of Health and Longevity on Risk Tolerance

We investigate the effects of health and life expectancy on tolerance of financial risks. In the first part of the paper, we consider a standard life-cycle consumption model in which an individual chooses his optimal consumption path for an exogenously determined level of health and longevity. We examine preferences for a risk to lifetime income and show that even in this simple model, the effects of health and longevity on risk tolerance are generally ambiguous. The exception occurs when optimal consumption is constant over the remaining lifetime, a benchmark case in which health and longevity never affect risk tolerance. However, we also show that, even if optimal consumption is not constant, health and longevity have no effect on risk tolerance for most standard utility functions used in the economics literature. In the second half of the paper, we design and conduct a stated-preference survey to empirically test the effects of health and longevity on risk tolerance. Survey respondents were randomly selected adults from the United States (n = 2,795). The survey includes self-reported measures of health, as well as dichotomous-choice questions concerning gambles on lifetime income that allow us to classify respondents into four groups that can be ordered by relative risk tolerance. We estimate regression models relating relative risk tolerance to self-reported health, actuarial estimates of life expectancy, and other respondent characteristics. Our empirical results suggest that risk tolerance is positively related to both health and life expectancy