Individual Differences in Risk Preference: Selection and Socialization Effects

Risk preference varies considerably across individuals, but the consequences and causes of this heterogeneity remain insufficiently understood. This study examines the predictive validity of risk preference for various life events (i.e., selection effects) and the role of life events in shaping risk preference (i.e., socialization effects). Using a large representative sample from the German Socio-Economic Panel (SOEP; N = 14,558), we employed propensity score matching to construct synthetic treatment and control groups—individuals experiencing (or not experiencing) a life event—while controlling for various confounding variables. We then evaluated the extent to which general and domain-specific measures of risk preference predict the occurrence of 12 life events related to family transitions (e.g., marriage) and professional development (e.g., self-employment), as well as how these life events shape risk preference. Our findings provide evidence for selection effects by demonstrating that risk preference significantly predicts the occurrence of various life events. Furthermore, the predictive utility of risk preference generalizes across domains, with general or composite measures demonstrating somewhat superior predictive power relative to domain-specific ones. In turn, after adjusting for selection bias, socialization effects were negligible, with most life events showing no significant association with changes in risk preference. Overall, our results suggest that while risk preference has broad predictive power across various life areas, life events have a limited influence on shaping it. These findings reinforce the predominance of selection effects and underscore the importance of carefully distinguishing between selection and socialization processes.