Income Risk, Precautionary Saving, and Loss Aversion – An Empirical Test

Abstract

This paper empirically examines Kőszegi and Rabin’s (2009) hypothesis that uncertainty about future income triggers precautionary savings among loss-averse individuals. We extend their theoretical analysis and empirically study the relation between income risk, loss aversion and precautionary savings among a sample of the low-income population subject to substantial income risk. We find that savings are higher for individuals who face higher income risk (unemployment). The results confirm the theoretical prediction and individuals who are more loss-averse save more.