Intra-household risk-taking: a closer look

The problem

To create saving and investment recommendations for households, policy analysts and researchers typically use a ‘unitary model’. This treats a household (like a couple) as if it were one single decision-maker with one shared attitude to risk. However, partners often have different attitudes towards financial risk-taking (cautious vs willing, for example) and they often negotiate decisions between them, meaning recommendations can be misleading.

The research

This research looks at how couples make investment decisions together, rather than treating the household as if it were a single person with one set of preferences. Developing a detailed model for the saving and investment decisions of a dual income couple – a ‘collective’ life-cycle portfolio choice model – they find that partners who have different appetites for risk prefer to bear more financial risk than a single person with a risk appetite equivalent to the couple’s average. This is because the couple can share risk within the household, which works like consumption insurance for the more cautious partner. Importantly, they also show that risk sharing has a larger impact on investment decisions than simply having two incomes. Overall, the study suggests that household investing is better understood this way – when couples are recognised as two people who may think differently about risk and negotiate financial decisions, rather than treating them like a single decision-maker.

The impact

Showing that couples and singles often benefit from different investment strategies has clear implications for any analysis of financial risk-taking, since nearly half of couples have different attitudes towards risk. Models and policies that account for differences within couples could support a range of finance decision-making contexts, such as more effective pension design and financial planning for households, including the design of default funds in the Australian superannuation industry.

Department: Finance 
Area: Investing, financial planning