An Experimental Approach to Preference Parameters and Behavioral Heterogeneity in the Health and Retirement Study

This paper describes the early results of an experimental attempt to elicit individual preference parameters by means of direct questions closely derived from economic theory, and to study econometrically the behavioral implications of heterogeneity in the measured parameters across individuals. Participants in the Health and Retirement Survey were asked to respond to hypothetical situations specifically designed to elicit information about their risk aversion, subjective rate of time preference, and willingness to substitute intertemporally. These three parameters are essential to individual choices involving wealth accumulation, retirement, portfolio on this behavior. Despite the analytic importance of these preference parameters, econometric studies have not fully resolved even issues involving their mean values. The usual econometric estimation of these and similar parameters may be insufficient when heterogeneity of preferences in the population is important. In this case it may be of interest to have an "estimate" of the parameters of interest for each individual in a cross-section or panel, not just the average value of that parameter in the population. Given individual level data, the covariances between the estimated parameters and observed behavior with regard to saving, portfolio choice, labor supply, insurance purchases, etc. would then be subject to study. The standard econometric approaches would at most yield a distribution of a parameter across the population, without being able to assign values of the parameter to specific individuals.