Divorce as risky behavior

Divorce is a gamble.   In deciding whether to make this life-course transition, couples must weigh the wealth and happiness they expect to receive by remaining married against the uncertain value of separation.  Because divorce typically entails a short-term reduction in their financial well-being (Bianchi et al. 1999; Smock 1993), women in particular  must consider whether their expected gains in other dimensions (autonomy, future income, etc.) will offset immediate financial losses.  While the inherently risky nature of divorce is widely acknowledged in the policy arena and social science literature, the proposed study will be the first to address the following question:    How important are individual levels of risk aversion in determining who divorces?

Risk aversion refers to an individual's reluctance to give up a guaranteed amount of income, wealth, or "utility" for an amount that is expected to be higher, but might be lower.  The concept of risk aversion (or its inverse, risk tolerance) has played a formal role in economic theory since the seminal work of Knight (1921).  However, researchers only recently developed a scientifically valid method to measure risk aversion by asking survey respondents about their willingness to accept well-defined income gambles (Barsky et al. 1997).    In this study, we will use responses to income gamble questions available in the NLSY79 in an empirical analysis of the determinants of divorce.  Our specific objectives are as follows:

- We  will  determine  how  the  probability  of divorce differs  for  the  highly  risk averse, the moderately  risk  averse,  and  the  highly  risk  tolerant.    To  do  this,  we  will  compare  the predicted divorce probabilities for individuals who are otherwise observationally  equivalent, but whose levels of risk aversion place them at, e.g., the lOth, 50th, and 90th percentiles in the overall distribution.

-We will learn who "risk lovers" and "risk haters" are-that is, we will assess the correlation between risk aversion and race, ethnicity, family background, schooling attainment, wealth, and other factors that are known to be important factors in union formation.

-After "netting out" the direct effects of risk aversion, we will reassess the effects on divorce probabilities of household wealth, earnings potential, and other factors.  One pattern that has been convincingly  established  is that women who participate in the labor market are more likely  than  nonemployed  (or  intermittently  employed)  women  to  get  divorced  (Jalovaara

2003; Schoen et al. 2002). We will learn the extent to which this pattern is due to "economic independence" and the extent to which it is explained by risk aversion.