Risk and Career Choice

University of Pennsylvania
Advances in Economic Analysis & Policy 02/2005; 5(1):1414-1414. DOI: 10.2202/1538-0637.1414
Source: RePEc


Choosing a type of education is one of the largest financial decisions we make. Educational investment differs from other types of investment in that it is indivisible and non-tradable. These differences lead agents to demand a premium to enter careers with more idiosyncratic risk. Since the required premium will be smaller for wealthier agents, they will tend to enter careers with more idiosyncratic risk.
After developing a model of career choice, we use data from the Panel Study of Income Dynamics (PSID) to estimate the risk associated with different careers. We find education, health care, and engineering careers to have relatively safe streams of labor income; business, sales, and entertainment careers are more risky.
By choosing a college major, many students make a costly human capital investment that allows them to enter a specific career. To examine the link between wealth and college major choice implied by the model, we use data on choice of college major from the National Postsecondary Student Aid Survey (NPSAS). Controlling for observable measures of ability and background, we find evidence that wealthier students tend to choose riskier careers, particularly business.

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    • "Neither of these papers analyzes the differential impact of initial income on different careers. Saks and Shore (2005) examine how the financial risk associated with different careers influences career choice using the National Postsecondary Student Aid Survey from US. In their model, individuals demand a premium to enter careers with more idiosyncratic risk. "
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    ABSTRACT: In this paper, we examine the college major choice decision in a risk and return framework using university entrance exam data from Turkey. Specifically we focus on the choice between majors with low income risk such as education and health and others with riskier income streams. We use a unique dataset that allows us to control for the choice set of students and parental attitudes towards risk. Our results show that father's income, self-employment status and social security status are important factors influencing an individual in choosing a riskier career such as business over a less risky one such as education or health.
    Preview · Article · Aug 2008 · Economics of Education Review
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    • "People's choice of careers with risky income profiles also runs against very high risk aversion (Saks and Shore, 2004), as does their choice to hold most of their wealth in illiquid housing that carries a significant amount of risk (Cocco, 2003). "
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    ABSTRACT: While this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption.
    Preview · Article · Jun 2005 · Journal of the European Economic Association
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    ABSTRACT: The U.S. fertility rate has declined dramatically over the last three decades, at the same time as the mean age at rst birth has increased. This paper studies the role of rising earnings uncertainty in explaining these patterns in an Aiyagari-Bewley- Huggett framework augmented to include fertility decisions. Building on Becker and Tomes (1976), I model fertility decisions as sequential, irreversible choices over the number of children, accompanied by parental choices of time and money invested to- ward improving children's quality. The model is calibrated to replicate cross-sectional patterns of fertility, income, consumption, and saving. I nd that young households postpone childbearing when income uncertainty is high, preferring to work and to accu- mulate more precautionary savings before starting a family. This birth postponement, in turn, reduces the number of births per household. The model indicates that the actual increases in the U.S. idiosyncratic earnings uncertainty as estimated by Meghir and Pistaferri (2004) can explain about one-half of the decline in fertility and one-third of the increase in mean age at rst birth in recent decades, while matching all of the increase in the mean age at second birth.
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