Evidence on preferences and subjective beliefs of risk takers: The case of smokers

Abstract One reason that cigarette consumption is highly regulated is because of the paternalistic view that smokers would not make rational choices even if fully informed about the risks. A deficiency of this view is that in the presence of preference heterogeneity regulating smoking may lead to smokers finding ways to circumvent the regulations. Though there is widespread recognition that preference heterogeneity may exist there is very little documentation of it. In this study, we provide empirical evidence on the relationship between smoking status, and time and risk preference, valuation of health, and subjective beliefs about future macroeconomic events, using panel data from the Health and Retirement Study. We find that smokers are more impatient than nonsmokers and are more pessimistic about future macroeconomic events, which may reinforce their present orientation. Smokers are also more risk tolerant. This suggests that smokers may more willingly bear risk, and trade off current utility against future costs of smoking. However, they do not value being in excellent health differently from others. Our results also suggest that being more present-oriented and risk tolerant is not caused by smoking, but represents innate characteristics. An implication of our results for product regulation is that restricting access to cigarettes is likely to be circumvented by smokers through other means. In particular, our results are consistent with the finding that smokers in states with higher taxes smoke longer cigarettes that are also higher in nicotine and tar content.