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The Impact of Income Fluctuations on Risk Preferences Among the Poor

ByThe Short Paper

Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles

This study explores how the income fluctuations experienced by low-income individuals affect their risk preferences. The researchers focused on the impact of payday cycles in the United States and found that those heavily reliant on social security became more risk-tolerant before payday. This shift in risk preference may lead to suboptimal decisions and potentially reinforce poverty. The study suggests that mental health and relative deprivation, rather than cognitive decline, play a significant role in this phenomenon. Similar evidence was also observed among the elderly population in Japan.

Risk tolerance – refers to a person’s willingness to take on financial risks or uncertainties when making decisions about their money.

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.

https://www.aeaweb.org/articles?id=10.1257/app.20220073

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