Well-being of the baby boomer generation has been a concern for decades, particularly regarding retirement well-being. An unbalanced attention, however, has been concentrated on old baby boomers, motivating the current study to model well-being of young baby boomers in economic, physical, and psychological dimensions, where the predictors of well-being such as risk-taking behavior in different domains were simultaneously endogenously determined within the theoretical framework.
The data used for this study were from the 1979, 1980, 1981, 1993, 2000, 2002, 2004, and 2006 waves of the National Longitudinal Survey of Youth 1979. Well-being in each dimension, investment in risky financial assets, and investment in education are jointly modeled using simultaneous equations models.
In the first equation of the simultaneous equations model, years of schooling which was an indicator of education investment was predicted by one’s risk tolerance and a set of preference characteristics. Objective risk tolerance under the drug use and sales domain was found to have a significantly negative impact on years of schooling, which means less risk tolerant persons invest more in themselves via education. Consistently, females, Hispanics, and Blacks who were commonly considered less risk tolerant or more economically disadvantaged were found to have more years of schooling. The findings provide evidence for the argument that investment in education may be viewed as one type of insurance, rather than as risky investment, by the young baby boomer generation. Young baby boomers who were not married or did not have any children also had more years of schooling, reflecting the fact that investment in education involves considerable opportunity costs. Therefore, the young boomers who were comparatively short of time tended to invest less in education. Notice that parental education and education of the oldest sibling affected education attainment of the young baby boomers, implying a lasting and extensive effect of education investment that spreads not only from generation to generation but also within generations.
The second equation in the simultaneous equations model was to examine potential factors that explained any discrepancy in risky financial investments across the young boomers. Empirical results supported the hypothesis that investment in education is a significant predictor variable, which means the young baby boomers who have more schooling allocate their money in the financial market in the form of holding more stocks or possessing a higher ratio of risky financial assets to financial assets, including stocks, corporate bonds or government securities, and mutual funds. Economic indicators such as net worth and total family income had a positive effect, regardless of the definitions of risky financial investments, which implies risky financial assets are normal goods. Home ownership was also a significant predictor for both risky financial investment measures, suggestive of a mechanism of diversification provided by home ownership that helps to minimize the risk from any investment. Objective measures and survey-based measures of risk tolerance, however, failed to account for multi-dimensional nature of risk.
The last equation in the simultaneous equations model was to examine the determinants of individual well-being in particular dimensions. Empirical evidence demonstrated the importance of risky financial investment in determining the difference in economic well-being and the significance of education investment in predicting the discrepancy in economic well-being and psychological well-being, namely self-esteem. Total family income partially explained the disparity in psychological well-being. Note that preference characteristics played different roles across well-being dimensions, accounting for a larger proportion of variation in economic, physical, and psychological well-being. These results are suggestive of multi-dimensional well-being that cannot be predicted by one single common factor, implying the necessity of diversity of government policies and programs.
Based on the empirical results, theoretical and policy implications were drawn. These findings suggest that the original Capital Asset Pricing Model partially explained demand for risky financial assets. Deviations from the model emphasize the importance of adding human capital and other types of assets to the explanation of demand for risky financial assets. The current study has several implications for practitioner, policy makers, and researchers. These implications pertain to allocation time and money on investments in different domains, appropriate guidance to meet clients’ financial goals in terms of their time-varying, conditional risk tolerance, instant transfer and tax policies for subsidizing education investment, and development of assessment instruments including multi-dimensional situations and scenarios in each specific domain to assess risk tolerance of individuals.