Risk Preferences Over Health: Empirical Estimates and Implications for Medical Decision-Making

Abstract

Mainstream health economic theory implies that an expected gain in health-related quality of life (HRQoL) produces the same value for consumers, regardless of baseline health. Several strands of recent research call this implication into question. Generalized Risk-Adjusted Cost-Effectiveness (GRACE) demonstrates theoretically that baseline health status influences value, so long as consumers are not risk-neutral over health. Prior empirical literature casts doubt on risk-neutral expected utility-maximization in the health domain. We estimate utility over HRQoL in a nationally representative U.S. population and use our estimates to measure risk preferences over health. We find that individuals are risk-seeking at low levels of health, become risk-averse at health equal to 0.485 (measured on a 0–1 scale), and are most risk-averse at perfect health (coefficient of relative risk aversion = 4.51). We develop the resulting implications for medical decision making, cost-effectiveness analyses, and the proper theory of health-related decision making under uncertainty.

The full study can be viewed at Journal of Health Economics.

Mulligan, K., Baid, D., Doctor, J. N., Phelps, C. E., & Lakdawalla, D. N. (2024). Risk preferences over health: empirical estimates and implications for medical decision-making. Journal of Health Economics, 94, 102857.