Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles
American Economic Journal: Applied Economics
vol. 15,
no. 4, October 2023
(pp. 68-99)
Abstract
The poor live paycheck to paycheck and are repeatedly exposed to strong cyclical income fluctuations. We investigate whether such income fluctuations affect their risk preference. If risk preference temporarily changes around payday, optimal decisions made before payday may no longer be optimal afterward, which could reinforce poverty. By exploiting social security payday cycles in the United States, we find that the poor relying heavily on social security become more risk tolerant before payday. More than cognitive decline before payday, the deterioration of mental health and relative deprivation are likely to play a role. We find similar evidence among the Japanese elderly.Citation
Akesaka, Mika, Peter Eibich, Chie Hanaoka, and Hitoshi Shigeoka. 2023. "Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles." American Economic Journal: Applied Economics, 15 (4): 68-99. DOI: 10.1257/app.20220073Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- I12 Health Behavior
- I32 Measurement and Analysis of Poverty
- J14 Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination
- J31 Wage Level and Structure; Wage Differentials
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