Household Finances And Attitudes Towards Risk

The authors explore the relationship between risk preference and the level of unsecured debt at the household level within the context of a two period theoretical framework, which predicts that debt is a function of risk aversion. They test the predictions of their theoretical framework for a sample of households drawn from the U.S. Panel Study of Income Dynamics (PSID) and the U.S. Survey of Consumer Finances (SCF). Using a sequence of questions from the 1996 PSID and the 1989 to 2004 SCF, they construct measures of risk preference allowing them to explore the implications of interpersonal differences in risk preference for the accumulation of unsecured debt at the household level.