A Bird in the Hand is Worth Two in the Grave - Risk Aversion and Life-Cycle Savings
Abstract: We explore the role of risk aversion on life-cycle savings and portfolio choices. We consider a setup where agents are endowed with recursive preferences, enabling us to disentangle risk aversion and intertemporal elasticity of substitution. Agents face mortality, income, and investment risks, and assign a positive value to being alive. In this framework, the overall impact of risk aversion is theoretically ambiguous, as shown by Bommier, Chassagnon and LeGrand (2010). We carefully calibrate this life-cycle model, with particular attention to the value of a statistical life, and find clear-cut results: greater risk aversion implies smaller (not larger!) savings and safer investment strategies. The impact of mortality risk therefore dominates the other ones.