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Economists Study Birth Order and Risk Taking

05.10.2009
Does birth order determine someone’s willingness to make risky economic decisions?

An experimental economist at The Darla Moore School of Business at the University of South Carolina and a recently graduated doctoral student think so -- and they have the data to prove it.

Dr. Melayne McInnes, an associate professor in economics, and her student, Erica Morgan, found that first-born siblings tend to be more risk-averse and more patient in making monetary decisions. Conversely, last-born siblings tend to be bigger risk takers, willing to gamble for a higher payoff and less willing to wait unless the rate of return was much higher.

“In the large scheme of things, economists want to understand decisions to save money or to invest in an education or a risky venture,” McInnes said, “and these decisions are driven by risk tolerance and patience. Sometimes, we want to control for risk attitudes in our calculations, so having a rough screen can be helpful.”

To test the hypothesis, McInnes and Morgan devised different scenarios that offered participants the possibility of larger payoffs with higher risk, smaller payoffs with lower risk, larger payoffs with a longer time delay and smaller payoffs with a shorter time delay. The kicker: They used real money, provided through a National Science Foundation grant.

“You have to use real currency in experiments like this,” said Morgan, who earned her doctorate in August and is a statistical and research analyst with the S.C. Department of Commerce. “Hypothetical gains or losses with Monopoly money don’t measure people’s real attitudes. Field validity is important.”

The experiments involved nearly 400 participants in three-part sessions, and the results bore out the hypothesis.

“What we found is that older siblings were more averse to risk and more willing to wait to receive a higher payout,” Morgan said. “First-born siblings required more compensation if they were going to assume more risk, and younger siblings had to be offered a higher rate of return for them to be willing to wait for a payout.”

Gender and race, which have been thought to affect one’s risk aversion, proved not to be as strong an indicator as birth order, McInnes said.

“If birth order differences in risk and time preference matter, then we’d expect to see younger siblings initiating risky behaviors at earlier ages,” McInnes said. “Using a nationally representative data set with rich information about family characteristics, we find that the oldest siblings do not start smoking, drinking or using marijuana as early as their younger brothers and sisters.”

Morgan, a first-born, is true to form: risk-averse. McInnes, a second-born, said she is also risk-averse. She attributes the anomaly to an outlier older sibling who loves to take risks. Both economists plan further studies on birth order, risk aversion and discount rates.

Peggy Binette | Newswise Science News
Further information:
http://www.sc.edu

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