Health Risk and Portfolio Choice

This article investigates the role of self-perceived risky health in explaining continued reductions in financial risk taking after retirement. If future adverse health shocks threaten to increase the marginal utility of consumption, either by absorbing wealth or by changing the utility function, th...

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Bibliographic Details
Published inJournal of business & economic statistics Vol. 26; no. 4; pp. 472 - 485
Main Author Edwards, Ryan D
Format Journal Article
LanguageEnglish
Published Alexandria Taylor & Francis 01.10.2008
American Statistical Association
Taylor & Francis Ltd
Subjects
Age
Background risk
Bequests
Consumption
Cross partial derivative
Financial portfolios
Health expenditures
Health insurance
Health risk assessment
Health risks
Health status
Hedging
Investment risk
Investors
Portfolio investments
Precautionary saving
Retirement
Risk aversion
State-dependent utility
Studies
Utility functions
Wealth
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Summary:This article investigates the role of self-perceived risky health in explaining continued reductions in financial risk taking after retirement. If future adverse health shocks threaten to increase the marginal utility of consumption, either by absorbing wealth or by changing the utility function, then health risk should prompt individuals to lower their exposure to financial risk. I examine individual-level data from the Study of Assets and Health Dynamics Among the Oldest Old (AHEAD), which reveal that risky health prompts safer investment. Elderly singles respond the most to health risk, consistent with a negative cross partial deriving from health shocks that impede home production. Spouses and planned bequests provide some degree of hedging. Risky health may explain 20%% of the age-related decline in financial risk taking after retirement.
ISSN:0735-0015
1537-2707
DOI:10.1198/073500107000000287